It's all about the employment.

I remember discussing this with a friend before, that there is a big chance the US Congress will do something to China's currency this year, as long as the overhaul of the health care come to a temporary stop. President Obama had expressed his will to have 'Serious Negotiation' with China on currency.

With all these pressure, will China raise the RMB value? I'm afraid not. Not this year, not in this political climate, not even 5%. First, it's not clear what's gonna happen if China raise the RMB value. In China, most consider it a bad thing, at least in the short run. Second, political decisions are made to maximize political interests and minimize political cost. What's the benefits of a decision like appreciating RMB value at this point? If it turns out well, it's only an admission that they made a mistake in the past. If it turns out bad, that's a lot of risk. Third, the RMB problem has become so sensitive, even a 5 - 10% appreciation will signal a major policy change. I don't think they want to add expectations to this hot topic right now and I don't think any major policy change can happen in China before 2012, the 'election' year of China. Unfortunately, something has to happen for the States before 2012.

You might wonder, 'what's going on?' Isn't the cheap products from China supposedly help to keep the inflation in the States in control, and the cheap credit from China help to finance the federal deficit? Yet this isn't a problem of money anymore. This is all about the employment, for both China and US.

The unemployment rate in US had declined unexpectedly from 10% to 9.7% in January, but jobless claims rose unexpectedly last week. Honestly, this shouldn't be a surprise at all. The up and downs in the job market are the late responses to the up and downs in the treasury market. As the US has a service economy, the new jobs mostly come from government employment and service sector expansion and they are both closely related to the sales of treasury bonds.

How's the employment in China? If you believe in the State Statistics Bureau, it's 4%(It's always 4-5%), but the Chinese Academy of Social Science put it at 10% for urban unemployment. The national unemployment rate is difficult to estimate because of the surplus labor in the country. Asian Development Bank put it above 30%.

So the China-US really makes a real interesting pair. They both have a gargantuan domestic structural imbalance. They both have severe unemployment problems. China exports too much. US imports too much. And both countries see export as the most important way of job creation! Is export really the best way of job creation? Not necessarily, but it's indeed the best way without going through the painful domestic structural reform.

What will happen, if, say the US Congress pass a tariff bill on all things made in China and it also pass through the senate and White House. Will the bill have a positive effect on US employment rate? It's a tricky problem. It might depend on how high the tariff. I actually believe a 20% tariff is very favorable to US. Not that factories will move back to the States. Even a 200% tariff won't have that kind of effect. It's good simply because that's a lot of money for the federal government.

The China-America trade system is so established, a 20% tariff can't break it. If fact, though I don't have the stats, but from some stories and personal experiences, the same products sold in US is already cheaper than in China now. This probably means the system has the potential to consume a 20% tariff. Walmart's profit might drop a little. Chinese factories will work even harder. Chinese government will subsidize export even harder or even depreciate the RMB. It will have some negative effects on US economy, like the rise of living cost, but the general effect will be good. The bottom line is if somebody is willing to pay for my bills why not let them pay more.

But if the tariff is 40-50% as many demanded now. The effect might be totally the reverse they wanted. The China-America trade pair will have to decouple. An often made, but not outspoken, yet misguided comparison of the current situation was Yen problem in the 80s and the Plaza Accord. For short, when Yen doubled its value, Japanese factories moved to other Asian countries, but if US put a 40-50% tariff on China, Chinese factories will sell things in the domestic market. Depends on what the Chinese government will do, it can be a good news for Chinese economy. After all, China already has $2 trillion. What's the point keep selling more products for dollars?

The effect on US economy might be bad as the cheap products and cheap credits from oversea are the key for the current service/consumption economy to work. Unemployment rate might go up to 20% and stay there for a rather long time. If that happens, it would be like the 1930s all over again. Bank robbers will make the head line of NY Times. Organized crimes will spring up. Above all, the danger of a hyperinflation. Just like most damage of a storm is not done by the storm itself but the Tsunami follows it. The worst damage of a financial storm is often its political consequences.

So mark my word, guys. 2012 won't be the end of the world but it might be the end of the world trade as we know now.