The US doesn’t name China a currency manipulator

This wasn’t exactly a surprise, despite Secretary Geithner’s comments in January. The US made a large global stimulus — and a larger IMF — its priority in the G20, not exchange rate reform.

Moreover, this isn’t the right time to force resolution of this issue.

China’s exports to world and US imports from China are both falling. Chinese reserve growth — read the amount of dollars China has to buy to keep its currency from appreciating — has fallen sharply. And perhaps most importantly, the RMB was one of the few emerging market currencies that appreciated during the crisis in real terms.

According to the (recently rebased) BIS real effective exchange rate index, the RMB has appreciated by over 10% since June 2008 — and by almost 18% since December 2007. Other indexes show sligtly smaller real appreciation. But there is little doubt that China appreciated in real terms when many other emerging economies depreciated in real terms. This seems to have been been an important factor in the Administration’s decision. The Treasury noted that the RMB was basically stable when most other emerging currencies fell (”As the crisis intensified, the currency appreciated slightly against the dollar when most other emerging market and other currencies fell sharply against the dollar.”)*


But make no mistake, China’s currency still looks undervalued. It is only a bit higher — according to the BIS index**– than it was in 2001 or 2002, back when China was exporting a fraction of what it does now. In other words, the rise in the productivity of China’s economy hasn’t been mirrored by a rise in the external purchasing power of its currency. That is a big reason why China’s current account surplus remains large.

And the underlying issue remains: the biggest driver of moves in China’s real exchange rate remains moves in the dollar. History suggests that China cannot count on dollar appreciation to bring about the real appreciation it and the global economy need if China’s surplus — and thus China’s accumulation of money-losing foreign assets — is going to come down. It will be hard — in my view — to have a stable international monetary system if the currencies of all the major economies but one float against each other. And China is now a major economy by any measure.

But it makes far more sense to have a fight over China’s exchange rate regime when China’s currency is depreciating in real terms and Chinese intervention in the foreign exchange market is rising — not when China’s currency is rising in real terms and Chinese intervention in the foreign exchange market is falling.

Especially when there are a few tentative signs that China’s stimulus may be gaining some traction.

The Obama Administration made it clear, I assume, that the size of China’s stimulus would be a factor in its judgment. The world needs demand. And if a large Chinese stimulus pushes up inflation in China and that led to a real appreciation, that would help bring about the needed real exchange rate adjustment even absent further nominal appreciation against the dollar.

Even the Peterson Institute’s Morris Goldstein – a hawk on this issue — didn’t seem to think this was the time to label China a manipulator. Back in January he argued that the US should indicate that China met the criteria for manipulation from 2004 to the first part of 2008.

“I think we have a somewhat more nuanced situation than we had a year ago or so. I think they should say, to set the record straight, that China had been manipulating in the past and still is doing so, but they were manipulating particularly from 2004 through 2007, 2008. They’re still doing it in the sense of large scale intervention to keep the renminbi from rising as much as it should. And that such currency manipulation is against the IMF rules of the game and it’s undesirable. The report should say that. The report should also acknowledge that in the last 15 months or so, they’ve made a lot more progress in allowing the rate to move. Their global current account surplus is peaked. It’s probably starting to decline. So I think they should be encouraged to cut down on the scale of intervention, but I wouldn’t recommend punitive penalties right now.”

So long China pegs tightly to the dollar and runs a large current account surplus though the basic issue is not going to go away.

* The appreciation against the dollar in nominal terms was so slight as to be almost impossible to perceive. ** Note that I used the old BIS RER series to infer January levels (based on the change from December), as the new series for China had some bizarre seasonality (the RER dipped every January for no obvious reason, and in a way that it didn’t in the old series) My guess is that there was a glitch somewhere in the production process for the rebased BIS series. It doesn’t change the basic story though. A chart based on the old data tells the same basic story.

Originally published at the Council on Foreign Relations blog and reproduced here with the author’s permission.

5 Responses to "The US doesn’t name China a currency manipulator"

  1. WIlson Siu   April 17, 2009 at 2:57 pm

    Since the RMB is pegged to the US dollar, the value of the RMB is derived from the US dollar. It is a two way relationship. One currency may go up relative to another currency, not because its currency is going up in absolute term, but the other currency is going down!According to Milton Friedman’s Quantity Theory of Money, the value of a currency has direct correlation to money supply.So much talk by some US officials and by some “economist” who suggest that China is manipulating its currency, if we look at it from another perspective, putting Proferssor Milton Friedman’s theory into perspective, it is the federal reserve who is manipulating the weakness of the US dollar by printing out so much money in the first place.Thus the naked fact about the argument is fundamentally wrong in the first place. What they are suggesting is that, because the federal reserve is increasing money supply at such an astonishing speed, thereby lowering the value of the US dollar, if China does not lower its value of the RMB also, China is a currency manipulator.The federal reserve is the ring leader in currency manipulator because all the currencies float against the US dollar. It is the only central bank in the world that has such power of debasing its currency relative to all other currencies and relative to gold.Well, to put it into perspective, China is now following the US(federal reserve), as fast as the US is debasing the value of the US dollar, China too is. Its M2 growth during the first 3 months of 2009 was at an astonishing 17%!The origin of the problem is the fed’s increasing money supply, thus devaluing the value of the US dollar. If others do not devalue, they are a currency manipulator.Literally, what China wants is a stable domestic currency in relationship the world’s reserve currency, which is used for trade. Without a stable currency, it is not easy for the private sector to do business as a huge part of China’s economy is in exporting.If we go back to square one of the problem, the root of the problem is the fed’s massive printing machine which leads to constant devaluation of the US dollar, resulting into the fundamental appreciation of the RMB. However, China being an export nation wants to have a stable currency for trade. Thus as the US devalues in fundamental and absolute term, the only way China can keep its currency stable is by buying US$.If the US did not abandon the gold standard, which would have gave the fed more discipline in their printing, the US dollar would not devalue, thus there would not be a problem of currency manipulation by other countries.When it buys US dollar to keep the RMB stable (from appreciating), China is called a manipulator. Thus China is using another mechanism now to prevent herself labeled as manipulator. She is following the Fed. You print, I print! Look at M2 for the first 3 months in 2009.Cheers, I welcome open discussion.

  2. Wilson Siu   April 17, 2009 at 3:00 pm

    There was a typo in the above. It should be”if China does not try to keep its currency stable, China is a currency manipulator.”

  3. Wilson Siu   April 17, 2009 at 3:03 pm

    Typo two.”The origin of the problem is the fed’s increasing money supply, thus devaluing the value of the US dollar. If others try to “keep their currency stable relative to the US dollar”, they are a currency manipulator”.

  4. Guest   May 11, 2009 at 8:41 pm

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