Ed Dolan's Econ Blog

Is China Still a ‘Currency Manipulator’?

“On day one, I will label them a currency manipulator.” So spoke Mitt Romney during Monday’s Presidential debate, threatening, as he has innumerable times, to hit China with new tariffs if it doesn’t stop using a cheap yuan to steal U.S. jobs. But does the label still fit?

We all know the story by heart. Without intervention by China’s central bank, market forces would push the value of the yuan higher, making it easier for U.S. producers to compete with Chinese goods. Instead, the People’s Bank of China (PBoC) manipulates the exchange rate by making massive purchases of U.S. dollars for its foreign exchange reserves. The result: huge current account surpluses that enrich China’s politically powerful exporters at the expense of American workers. If we just had a president with the courage to tell them to stop, we could get America moving again.

Unfortunately, although it still sounds great in a stump speech, the story may be out of date. Let’s look at it piece by piece.

Exchange rates

First, what’s been happening with exchange rates? The first chart below shows the closely-watched nominal bilateral exchange rate of the dollar vs. the Chinese yuan (or renminbi, if you prefer the official name). For most of the past two years, the yuan has been appreciating relative to the dollar. The more U.S. importers have to pay for each yuan, the more expensive Chinese goods become for American consumers, and the cheaper American goods become for Chinese buyers. So far, so good.

The next chart shows a version of the exchange rate that is more important for China—the so-called Real Effective Exchange Rate (REER). It differs from the nominal yuan-dollar exchange rate in two ways. First, it is adjusted for differences in inflation rates between China and its trading partners. Inflation can  make a big difference for international competitiveness. Second, it is a weighted average of exchange rates with the dollar, the euro, the yen, and all of China’s trading partners. The REER gives a broader picture of the overall competitiveness of the Chinese economy. It, too, has been appreciating, with some ups and downs, over much of the past several years.

Appreciation of the yuan is what you want if you are interested in selling goods to China or competing with goods from China. So far so good. But a closer reading of the charts suggests that not all is well for U.S. and European exporters and import-competitors.

First, although the yuan has been appreciating, there is good reason to believe that intervention by the PBoC has kept if from appreciating as fast as market forces would have dictated. Second, both the nominal and the real measures seem to show that the trend toward appreciation ended around the first of this year. True, both charts have a lot of volatility, so the apparent flattening of the trend could just be a statistical blip. But it could be something else. It could even mean that Chinese currency manipulators have redoubled their efforts and are no longer allowing even the gradual appreciation of previous years. For a better understanding of what is going on, we need more data.

China’s foreign currency reserves

The next chart shows what has been happening to China’s foreign currency reserves. Until mid-2011, they were rising steadily. That is the smoking gun behind the accusation of currency manipulation. Throughout all those years, the PBoC was letting the yuan appreciate only grudgingly. It was constantly fighting against market forces by buying up excess dollars and locking them up in T-bills so that they wouldn’t drive the exchange rate higher. Doing so was an expensive operation, but an effective one. China’s exporters, by all accounts, were very grateful to the PBoC for its services.

However, something odd happens after mid-2011. The steady increase in foreign currency reserves flattens out. In some months, reserves even drop a little. That is the opposite of what we would expect if the halt to the earlier appreciation of the yuan were driven by an intensification of manipulation. If that were the case, the flattening of the exchange rate curves in the first two charts would have coincided with an upturn of the reserves curve to an even faster pace of accumulation.

Instead, it looks like something else—market forces!—were what stopped the appreciation. It looks like the PBoC took its hands off the controls and the yuan just went into free flight, neither gaining nor losing altitude.

Just what are the market forces? The new trend has been going on for less than a year, so we can’t be sure. However, two prime suspects are the first trickles of capital flight from China and a slowing of demand for Chinese exports as the economies of its trading partners cool off.

China’s current account

To round out our understanding of the state of China’s currency manipulation, we need to look at one more chart. This one shows China’s current account surpluses. As everyone knows, those surpluses exploded out of nowhere in the early 2000s, reaching a towering 10 percent of GDP in 2007. The giant sucking sound of American jobs disappearing down the Chinese toilet was heard around the world, or at least, all around the Washington Beltway.

Then another odd thing happened. The surpluses began to shrink. That is what we would have expected during the global crisis of 2008 and 2009, but more surprisingly, they did not return even after the Chinese economy bounced back in other respects. Economists at the IMF, where the data in the chart come from, don’t see them coming back any time soon.

So, is China still a currency manipulator, or not?

The PBoC still buys and sells U.S. dollars on a daily basis in order to manage its exchange rate. In that sense, it could perhaps be called a “currency manipulator,” provided we were willing to apply the same term to Switzerland, Denmark, Bulgaria, and more than half of the other countries we trade with. However, if we want to use “currency manipulator” to mean something more sinister—some kind of rogue nation that steals our jobs and refuses to play by the rules everyone else has agreed to follow—then, increasingly, it looks like Chinese currency manipulation is a thing of the past.

Of course, the currency manipulation monster may not be dead, it may only be napping. It could be that Chinese leaders are so terrified at the prospect of being “labeled” by Mr. Romney that they have given up in advance, rather than risking the loss of face that would come from backing down to an American president.  Or it could be, if there is no break in current trends, that Mr. Romney will be the one who suffers a loss of face on inauguration day, either quietly abandoning his pledge or making a spectacle of himself by “labeling” an obviously dead currency dragon.

14 Responses to “Is China Still a ‘Currency Manipulator’?”

ricoOctober 24th, 2012 at 1:22 pm

pot calling the kettle.. US FED is actively and agressively printing money and seeking devaluation (QE1,2,3). The keeper of the only one world reserve currecy is seeking devaluation of the world reserve currecy by unilatterally printing money. Anyone thinks they can hide in argument behind eledged mechanisms in China? US is manuipulation champion.

raddaddOctober 24th, 2012 at 5:23 pm

Hey, Rico. Got a tip for ya: The Fed isn't printing a dime. QE is an asset swap, the Fed gets bonds and banks get reserves. We don't manipulate any more than anyone else does.

ThomasGrennesOctober 24th, 2012 at 9:47 pm

The Fed does swap bonds for newly created bank reserves in its open market operations, but the operation is equivalent to printing money. If the Fed paid for the
bonds with new dollar bills instead of new bank reserves, the effect on money would be the same. Recently, commercial banks have responded to these increases in bank reserves by holding more excess reserves. Consequently, there has been a smaller
increase in the money supply per dollar of new bank reserves.

ThomasGrennesOctober 24th, 2012 at 9:37 pm

Because "currency manipulation" is not precisely defined, there is room for much loose talk about it. The United States and China are members of the IMF and WTO, and neither agency forbids currency manipulation or has ever punished a member. Even the 1988 US law that mentions currency manipulation is vague, and it does not specify a penalty for the manipulator. Instead the President is required to report manipulators to Congress
and to "negotiate" with manipulators.

rakesh kumarOctober 25th, 2012 at 4:43 am

the china has indeed taken the advantage of low cost production because the wages and credit is availalble at cheper rate. this production has to be pushed forward. chinese central bank has been intervening to keep the yuan at a value where the export is accepted at the lowest trade price. for years it has been exporting to europe and US. but now when it comes to tackling the issue of unemployment in US, the import in any case had to be cut down. china has been adding foreign exchange only to push the export through manipulation in exchange rate. sometimes it is yuan which is put into circulation to control the liquidity in order to take the benefit of export or some time it is dollar to take the advantage of the export through different mode. but overtly or covertly the growth rate is kept high through manipulation in the currency.

lucad10October 26th, 2012 at 5:33 pm

I suppose that even considering REER graph trend (i.e: from 85 in 2006 to 108 in middle 2012) yearly Yuan appreciation seems close to 4% per year (i.e.: 108 minus 85 = 23 which represent a +27% in total or 4.16% per year).

If so and we consider China entering into WTO with a labour cost of 200$/month, I doubt that a +27% increase which bring it to 254$/month would mean a reduction in real competitiveness.

Which increase would it have happened with a real free floating x-rate regime ?

(please also consider that increase in reserves seem +24% per year or 3250/1550 = 2.09 or 109% in 4,5years = 24% yearly rate)

As far as western world does not link emerging economines access into WTO to a real x-rate free floating soon to be implemented, we will experience increase in unemployment (no matter how many QEs will be introduced).

Please Ed revert if I am totally wrong.

Ed Dolan EdDolanOctober 27th, 2012 at 1:23 am

Lucad10– Thanks for the comments/questions. Here are my replies:

1. "If so and we consider China entering into WTO with a labour cost of 200$/month, I doubt that a +27% increase which bring it to 254$/month would mean a reduction in real competitiveness."

I agree, 27% would be a modest appreciation and would put only a moderate dent in competitiveness. However, keep in mind that the BIS REER series is deflated by CPIs in the various countries. A better measure of competitiveness is the real rate deflated by unit labor costs, a measure that takes into account costs including productivity trends and wage trends. US ULC has been pretty flat during the recession, even slightly falling over the last six quarters, because of sluggish wage growth and rising productivity (see data here: ). China's ULCs have been rising much more strongly, probably something like 15-20 percent per year in the export sector. (See some estimates in this report from the Boston Consulting Group:… ). So the competitiveness gap has been closing faster than the CPI-weighted numbers show (more on that point here:… )

2. "Which increase would have happened with a real free floating x-rate regime ? "

Who knows, but the appreciation would have been more, for sure. Please don't misunderstand me–I don't want to say that China has never intervened to hold the rate of appreciation down. Obviously it has done so, and very openly. My point is just that such activity has slacked way off in the last year but the politicians haven't noticed yet.

3. "(please also consider that increase in reserves seem +24% per year or 3250/1550 = 2.09 or 109% in 4,5years = 24% yearly rate) " Yes, China's reserves grew rapidly. However, lots of countries do the same thing, and more so. See, for example, this interesting post that includes data showing that Switzerland's currency intervention and reserve growth have been much more aggressive than China's. (… ). So why is Mitt not ranting about "labeling" Switzerland a currency manipulator? Or at least a dozen other countries that intervene more than China? He could spend his whole first month in office "labeling" them one after another.

The point is, what China has been doing may well be bad policy, both from their point of view and ours. However, it is not all that unusual and lots of WTO members do the same thing without anyone ever raising an eyebrow.

everneweconOctober 26th, 2012 at 8:42 pm

When Japan was in its lost decade
the first one) it's recovery was
siphoned off of when people borrowed
yen to buy Icelandic Krona so as to
chase the ultra high yields supported
by the mortgage bubble worldwide.

With the TBTF banks still guarded from
loss-taking with near free reserves
until the Federal Reserve (?–)
can buy the MBS's so as to unwind them
and/or sell them back at market value,
and then with the bankers knowing what
from the shadow inventory is coming
available really cheap, COMBINED with
Congress and others crying foul at
China, our (U.S.) government is on the
edge of creating a carry trade wherein
the U.S. is Japan and Iceland at each
one's worst moment.

The real uncertainty in the market, to me,
has to be the Liquidity Trap's making
every would-be investor wondering what
it will take for cash to earn a comparable
return, say, a little into the future compared
with currently (it's hard to see how rates
can go below -0-, though Bernanke's been
obviously dead set on negative returns
on steroids with the obvious intent of
arm-twisting all who SOLD the bubble to
buy it back from the banks.

Our (the U.S.') liquidity trap is China's
dollar trap.

They don't call them traps for nothing.

Really, to me it appears China deserves
credit for inventing flexibility with the
"impossible trinity," allowing bending on
capital controls to afford bending on the
exchange rate.

They HAVE, in fact, allowed the yuan
to rise some, along with their raising of
the minimum wage, thus improving their
own Terms of Trade, all the while our
Federal Reserve and Congress are doing
exactly the opposite, trashing the
middle class.

Have a nice day.
(I'm not meaning to self-promote,
but if you look for me I moved
to host weebly.)

Actually, this is my first post here. I'm not meaning to
double-post. There was a place for my own site, but I
don't see that now. So here it is:

i date asiaDecember 23rd, 2012 at 10:29 pm

Thanks for writing this. I really feel as though I know so much more about this than I did before. Your blog really brought some things to light that I never would have thought about before reading it. You should continue this, I'm sure most people would agree you've got a gift.

Evette PetersonFebruary 4th, 2013 at 11:39 pm

My first clue was the fact that China is suppressing its own currency value and intentionally depreciating it. They also make a lot of trade surplus using gold for developing countries to debt them with fixed exchanges.