"Our Problems Are Our Own Making": U.S. Can't Blame Woes on China, Merk Says

Tensions between China and the U.S. have heated up recently.

At his annual press conference Sunday, China's Premier Wen Jiabao firmly said the Chinese currency, the yuan, is not undervalued. Wen also said U.S. efforts to boost exports by weakening the dollar amounts to "a kind of trade protectionism," as WSJ reported.

Senator Chuck Schumer and NYT columnist Paul Krugman joined the fray on the American side, reviving charges of currency manipulation against China.

Financing our deficit abroad then crying protectionism is a tough argument to win for America, says our guest Axel Merk, president of Merk Investments. "You're only shooting yourself in the foot. Our problems are our own making."

"The U.S. should be pursuing a strong dollar policy," he adds. "But at the same time, China should do the same thing."

Merk, whose firm is long the yuan, argues a stronger currency is in China's long-term interest. Among the reasons why: 

• China must dampen domestic inflation -- including a hot real-estate market. China's inflation has reached a 16-month high and new loans exceed forecasts, as Bloomberg News reports.
• China needs to lift domestic demand for goods through more purchasing power; China has no intention of fueling mainland demand by encouraging consumption fueled by personal credit-cards.
• As Chinese goods move up the food chain and away from disposable, cheaper-priced items, the country's exports can compete on quality, not just price.

Will the yuan ever float? China's currency policies have kept the yuan effectively pegged to the dollar since the government halted the yuan's gradual appreciation in mid-2008, as WSJ explains. Merk forecasts China eventually will float its currency, but only when it's ready and not at the urging of foreign politicians.

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