Sunday, 19 April 2009

Does the US believe China is manipulating it's currency or not?

Does the new Obama regime believe that China is manipulating it's currency or not? The US seems to be retreating. This retreat is almost certainly politically motivated. I would be very surprised if the US government did not believe some manipulation had gone on either in the past or in the present.

It is hard to believe that the yuan is not currently undervalued although it is also true that there are bigger problems out there that need to be addressed. Obama is picking his battles well and this is one he does not want to get into yet.

The final paragraph is telling. It is all politics and little to do with economics.

US retreats from yuan manipulation claims [FT]

The Obama administration on Wednesday rowed back from claims that China is manipulating its currency, declining to cite Beijing in a closely watched report to Congress.

The move avoids a confrontation with Beijing at a moment when world leaders are trying to present a united front against the economic crisis. It implicitly recognises China’s efforts to help stabilise the world economy by avoiding competitive devaluation and boosting domestic demand.

“The Chinese have shown great commitment to playing a stabilising role in the system,” a senior Treasury official told reporters.

Analysts said the decision not to cite China nonetheless represented a retreat by President Barack Obama – who suggested China was a currency manipulator on the campaign trail – and by Treasury Secretary Tim Geithner, who reiterated the charge on January 22 during his confirmation process.

Mr Geithner then submitted a written statement to Congress that said: “President Obama - backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.”

In a statement on Wednesday, Mr Geithner said the US still believed China’s yuan was undervalued, but cited four reasons for the decision not to name China as a currency manipulator in the report. China, Mr Geithner said, had “taken steps to enhance exchange rate flexibility.” It allowed its currency to appreciate slightly against the dollar as the crisis intensified and other emerging market currencies fell. It accumulated fewer reserves in the fourth quarter of 2008 and had “enacted a large fiscal stimulus” that would help rebalance demand.

Analysts said these trends were already in train on January 22. At that point, China had allowed its currency to appreciate relative to other emerging economies, had released the figures showing slower fourth-quarter reserve accumulation and had announced its $579bn stimulus.

US officials said developments since January 22 strengthened these trends, with China reaffirming its commitment to currency flexibility, holding to its currency stance, accumulating still fewer reserves in the first quarter of this year and reinforcing its stimulus measures.

Reaction in Congress - where the heat appears to have gone out of the issue - was muted. The Financial Services Forum, a financial sector lobby group, said the decision not to cite China in the report was “the prudent call.”

Several business groups endorsed the decision, though some manufacturing groups complained. Calman Cohen, president of the Emergency Committee for American Trade, a business lobby group, said: ”The Obama administration has time to work on this issue.”

Bill Reinsch, president of the National Foreign Trade Council, said ”the moderate Democrats in Congress came to a conclusion some time ago that it is not in anyone’s interest to rock that particular boat just at the moment.”



frances said...

wow! this blog really has a lot of informative stuff about china and its economy. thanks for putting it up for all of us to read.

i did find an interesting post on investment banks in china and blue ocean strategists. i hope you find the post interesting.

Anonymous said...

The US Senate a few years ago proposed a 27.5% tariff to offset the apparent undervaluation of the RMB. Since then the RMB has apprecited about 22% vs the US$ and even more against the Euro while the trade surplus has more then doubled. Recently, one study suggested the RMB may be about 10% undervalued which would hardly make a dent in the trade balance. Why are you so certain the "undervaluation" of the RMB is the real trade issue?

China Economist said...

Thanks for the comment. You will note however, that I did not say that the undervaluation is such a big deal.

The undervaluation is probably somewhere between 10 and 30%.

As an economist you are right that it is not such a big deal. It is the US politicians who think it is - that is what is worrying.

I do agree that a 10% or even 20% revaluation would have little impact on the trade surplus although the current recession is solving that problem with exports falling by larger percentages.

BUT, China is worried about job losses and will ensure a low currency to protect jobs and growth. This is what the US is worried about.

Anonymous said...

thanks for the comment. I expect China will try to keep the RMB stable re the US$ and work to address the need for more domestic consumption while assuming (hoping) exports don't decline too much more. China, like the rest of the world, needs the US and the EU to bottom out soon. Just a "flat" position will help China make the structural adjustments needed over time

Anonymous said...

One could also say that the US dollar is "overvalued" by being propped up by China and other countries which makes their currencies "undervalued."

If congress were serious, they would pass legislation limiting the amount other countries invest in T-Bills.

China Economist said...

The point about the dollar overvaluation is also true but the question is whether the Chinese buying US paper amounts to the same thing - Chinese manipulation of its own currency (via US paper).