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China's Currency "Manipulation"
Monday's New York Times op-ed page featured two columns arguing that China's policy of manipulating its currency to keep its exchange rate with the dollar constant is causing big problems for the United States and the rest of the world.
Here's the necessary background, via Paul Krugman: "Most of the world’s major currencies 'float' against one another. That is, their relative values move up or down depending on market forces." The renminbi (a.k.a. yuan), China's currency, is the main exception to the rule—China's leaders purposely weaken it by buying vast quantities of dollars.
"A heavily undervalued renminbi is the key financial distortion in the world economy today," write Niall Ferguson, a history professor at Harvard, and Moritz Schularick, a professor of economic history at the Free University in Berlin. "China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies," writes Krugman. Both columns urge President Barack Obama to address the issue with Chinese official during his visit to the country this week.
Both Krugman and the Ferguson-Schularick duo argue that China's management of the renminbi-dollar exchange rate is artificially deflating the yuan's value, making Chinese exports more attractive in places like the United States and making exports from all other countries less competitive—and keeping America's trade deficit with China massive. Ever wondered why everything is "Made in China?" This currency manipulation, Krugman and Ferguson/Schularick say, is a big reason why.
So it would almost certainly be in America's interests to get China to stop fiddling with the currency markets. Unfortunately, no one really knows how to do that. Here's the key paragraph from Ferguson and Schularick:
Call it the 10:10 deal: the Chinese get 10 percent growth; America gets 10 percent unemployment. The deal is even worse for the rest of the world — and that includes some of America’s biggest export markets and most loyal allies. The question is: What can the United States offer to make the Chinese abandon the dollar peg that has served them so well?
Ferguson and Schularick seem to think that the Chinese authorities' principle worry with letting the yuan appreciate is that their dollar reserves would be worth less. That's not nearly broad enough. The Chinese authorities' main priority is the survival of the current political regime. Maintaining high levels of growth and low levels of unemployment are crucial to achieving that goal—and that requires keeping Chinese exports cheap.
Chinese leaders are simply making a rational calculation. Until someone convinces them that the economic cost to China of keeping the yuan artificially cheap exceeds the economic benefit, they're going to keep on doing it.
Its true that having the
Its true that having the yuan devalued hurts American manufacturing, which is terrible for the economy. But we're in such deep trouble now that we're damned if we do and we're damned if we dont.
If the yuan continues to be artificially cheap, it is unlikely that gainful employment will increase in the US, as Chinese manufacturers are able to unfairly compete. However, if the yuan were float freely and appreciate in value, guess what? All our debt to China is going to appreciate in value. Harsh, isn't it?
A good compromise may be dipping into Ft Knox to pay off most of the Chinese debt, then tell them to either float the yuan, or we'll compensate by legislating punitive tariffs. Tapping into the reserves may seem foolish, but no matter what happens, we're going to suffer in the near future. We may as well deal with this reality sooner rather than later, and rid our collective conscience of burdening future generations with our mistakes.
I have read several times in
I have read several times in Money and Markets about the geopolitical time bomb surrounding China’s currency manipulation. The most recent was in my October 31 column. I expect this issue to grow in intensity and become a major point of contention for the global economy in the coming year. In recent days the chatter about China and its artificially weak yuan has been picking up....
The U.S. Treasury
The U.S. Treasury Department’s most recent assessment of foreign trading partners' exchange rate policies refused to state that China was manipulating the value of its currency to enhance its international competitiveness.1 However, a serious reading of all evidence on the matter clearly shows that China has exceeded all well-established limits that have been used to determine currency manipulation in the past.
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