China: The Unmoving Titan

As the interconnected economies of the United States and China battle out in a series of increased tariffs, we see a dramatic shift in currency. The USD is gaining more and more value in international trade. Economist Abba Lerner effectively predicted this phenomena in 1936 through his "symmetry theorem," in which he demonstrates that the effects of a tariff translate to a tax on exports. His theory indicates that a rise in tariff would mean a rise in the cost of imported goods. This higher cost of consumption would restrict U.S. business and household expenditures, stagnating the U.S. economy. Less USD would thus flow into the international market, causing deflation, or rise in value of the individual USD. In a world where economy and currency are both relative, this dramatic fluctuation in value is dangerous to the fragile balance of the global economy.

Perhaps even more interesting than the rise in USD is how unfazed the Chinese economy is to the trade war. In contrast to the USD, the Chinese Yuan, or Renminbi, drops in value. The current exchange rate of CNY to USD is 7.15 Yuan to 1 dollar. If you have traveled to China recently, you would know that just not too long ago, you could exchange 6 Yuan for a dollar. Of course, we are all talking in relative terms, so it is difficult to analyze to which extent the Chinese Yuan has dropped in value or the USD has increased in value. Nonetheless, it is clear that the Chinese currency is not increasing, at least not at the rate in which the USD increases.

The obvious answer to this unnatural phenomena is China's authoritarian, or "Communist," regime. The central bank of China is the People's Bank of China. In addition to that, the top four commercial banks in the nation are state-owned. These four commercial banks are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China, and the Agricultural Bank of China. In addition, the corporate market is overridden by state-owned enterprise, or SOE. Through SOEs, the Chinese government controls an astonishing 208 trillion RMB total assets of the secondary and tertiary sectors (industrial and service sectors), or 30% of its entire economy. As such, manipulating the country's currency is no difficult task for the central authorities.

It may come as a surprise that by the United States foreign trade policy, China is not recognized for manipulating its currency. This is because currency manipulation has a very clear definition. According to the 2015 Trade Enforcement Act, there are three criteria which constitutes manipulation:

• An annual $20 billion bilateral (trade) surplus with the U.S. -- This means that the total value of exports is greater than the total value of imports -- to such a great extent that currency manipulation may be the only explanation.
• Current account surplus of above 3% the country's annual GDP
• Persistent one-sided intervention in the foreign exchange market to depreciate currency

Prior to the trade war, China was able to manipulate its currency by meeting only the first criteria. This demonstrates just how effectively the central authority is controlling the economy. From carefully selling U.S. bonds to establishing a network of communication between state-owned banks to enforce a consistent exchange rate, the economic stability in China cannot be disrupted by even the world's greatest economic giant. But to what cost? With nearly 50% of the nation's total GDP under the government's hand, the common people of China has no access to their country's massive wealth. From a macroeconomic standpoint, China is a huge success story. But what about its microeconomics?