Say it isn’t so – NY Times reports China is manipulating their currency
Seeking to maintain its export dominance, China is engaged in a two-pronged effort: fighting protectionism among its trade partners and holding down the value of its currency.
In addition, Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions.
China buys dollars and other foreign currencies — worth several hundred billion dollars a year — by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.
Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003. At that point China was adding about $10 billion a month to its reserves, and in 2003 it ran an overall surplus on its current account — a broad measure of the trade balance — of $46 billion.
Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.
And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.
Make no mistake – this is a warning shot by the administration being fired at the Chinese. They are telling them that if there isn’t some sort of agreement reached by April 15th China will be declared a currency manipulator. Most people think that the US won’t do so because China hold so much US debt. Krugman disagrees
If Treasury does find Chinese currency manipulation, then what? Here, we have to get past a common misunderstanding: the view that the Chinese have us over a barrel, because we don’t dare provoke China into dumping its dollar assets.
What you have to ask is, What would happen if China tried to sell a large share of its U.S. assets? Would interest rates soar? Short-term U.S. interest rates wouldn’t change: they’re being kept near zero by the Fed, which won’t raise rates until the unemployment rate comes down. Long-term rates might rise slightly, but they’re mainly determined by market expectations of future short-term rates. Also, the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds.
It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.
American politicians, however, have calculated that raising China as an economic boogeyman can help them connect with voters afraid of losing work to foreign competitors.
“They take our markets and take our jobs,” Democratic Sen. Arlen Specter said of China when he confronted Obama at a public meeting last month. Specter, who is in a tough primary race in the Rust Belt state of Pennsylvania, said Chinese subsidies and what he called dumping are “a form of international banditry.”
Lawmakers have called on Obama to investigate China’s currency practices and have advocated penalty tariffs on Chinese imports if Beijing doesn’t make changes.
Obama has responded by vowing to get tough with China, saying that currency manipulation “puts us at a huge competitive disadvantage” and pushing for Chinese movement “to a more market-oriented exchange rate.”
Lawmakers will want to see action to back up those words. So far, however, Obama has followed the Bush administration’s lead by declining to name China as a country that manipulates its currency to gain unfair trade advantages. Such a designation would trigger negotiations and could lead to economic sanctions if the United States took a case before the World Trade Organization. Congress will be watching closely next month, when the Obama administration must submit another report on Chinese currency manipulation.
Liam Halligan takes the opposite view –
It’s also not clear that China’s currency is “under-valued” by all that much. Despite the peg, the yuan is 20pc higher than in 2005. This flies in the face of claims that the fall is America’s share of global exports – from 23pc to 18pc over the last five years – has happened because the yuan hasn’t been allowed to rise. But, then again, blaming foreigners is easier than restructuring clapped-out, bloated and heavily-subsidised Western factories.
The president is playing with fire. For one thing, his country is being kept afloat by China’s willingness to keep buying US government debt. Obama really should tread carefully. At the same time, the US is now at risk of sparking what could be an all-out trade war.
The reality is that America’s “weak dollar” policy – its long-standing practice of allowing its currency to depreciate in order to lower the value of its foreign debts – amounts to the biggest currency manipulation in human history. At the same time, the US has, for years, shamefully stalled on various rulings passed by the World Trade Organisation that show America to be breaching global trade rules.
Chinese inflation is now at 2.7pc – close to the official 3pc target. Beijing will eventually allow the yuan to rise, but in its own time and in order to tackle inflation and not because of US pressure. America needs to act smarter and get its own economic house in order. Obama has decided instead to lash out at China in a desperate attempt to placate a US electorate increasingly mindful of their president’s failings.
I have to say that Halligan’s piece reads like it was written by the Chinese embassy.
The Economist weighs in this morning with “The best thing American politicians can do to encourage a stronger Chinese currency is keep calm”
Their premise is that China is resisting letting the Yuan appreciate merely to be showing strength against the US and that attempts to getthem to change are counter productive –
Will the administration’s new tough talk move things in the right direction? Those who argue in favour of sabre-rattling do so on two grounds: first, that it is likely to shift China’s position, and second, that a stronger stance against China’s currency from the White House will diffuse protectionist sentiment in Congress. Both are dubious. China’s reactions so far suggest that American complaints make an imminent currency shift less, not more, likely. And a row could spur rather than diffuse anti-China action in Congress.
Rather than raising a bilateral ruckus, America would be far better off convincing other big economies in the G20 to press together for a yuan appreciation as part of the world’s exit strategy from the crisis. Cool and calm multilateral leadership will achieve more, with fewer risks, than a Sino-American currency spat.
The problem with the Economists soultion is the Chinese don’t think they are doing anything wrong and have been resisting this sort of pressure for years. The only way to force the issue is to brand them as a currency manipulator and raise tarriffs on their products. When Wal-Mart stops buying Chinese goods (Wal-Mart is China’s single largest non-government customer) you will see some major changes. I don’t agree with Krugman on much but I think he may be on to something this time.