This is the first of what I hope will be many posts on Nexstep, and seeing as how I have just returned to Shanghai from a six month stay in my native New York City, I thought I would dive head first into the blogasphere and discuss the exchange rate debate.

So much attention in US media is paid to the China exchange rate issue and how it impacts American workers. The popular media math goes something like this: a more freely floating Chinese RMB would make US exports more competitive vis-à-vis those from China, while US imports into the emerging consumer economy of China would also stand to gain competitiveness against Chinese made goods. If you’re reading this, you know the gist and you also know that there are many complex reasons, aside from maintaining robust exports, as to why the exchange rate is where it is: excess domestic liquidity concerns, currency speculation risks, and protecting a poor rural economy from more competitive imports are a few.

So let’s say China acquiesces and floats its currency against it’s own economic logic, what happens? Yes, US made goods would be more competitive against those made in China and US policy makers would have their fifteen minutes. But a recent report by the Hong Kong Institute For Monetary Research (the Hong Kong Monetary Authority’s think tank) suggests that we are forgetting to look at what’s on the other side of the trade coin: imports.

According to the report, some 40% of imports into China are intermediate goods produced in Japan, South Korea, Taiwan, and Singapore and are used to make finished goods in Chinese factories that are then exported to stores like Wall Mart in the US. This number helps explain the huge trade deficits China runs with the Asian countries it imports these goods from. Between 2000 and 2007, while China’s trade surplus with the US was almost tripling from $90 billion to $250 billion, China’s trade deficit with the aforementioned Asian countries has more than tripled form $39 billion to $130 billion. It’s an interesting omission in popular western media, but one that highlights the way in which regional and global supply chains have shifted to challenge the ways in which we must look at a country’s balance sheet.

So, if US media were to add the next sentence to their exchange rate monologue, the Hong Kong report suggests it might go something like this: China floats RMB and makes foreign imports cheaper, BUT this allows Chinese factories importing intermediate goods to keep the price of their exports level (if not reduced), maintaining the attractiveness of Chinese exports on the world market.

There are many other variables at play here, but I thought it was an incredibly insightful analysis of an issue that is often covered so superficially. Popular American discourse does not fully contemplate how the global supply chain has been shaped so as to make China more of the final stop on the assembly line, rather than a completely veritical manufacturing hub. As an entrepreneur and American businessman in China, I think that it is more important than ever to really cut through the chatter and look at the entire picture. What do you think?