Brad Setser

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The US doesn’t name China a currency manipulator

by Brad Setser
April 15, 2009

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.”)*

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.”

But so long as China pegs tightly to the dollar and runs a large current account surplus, 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.

54 Comments

  • Posted by Twofish

    DJC: I am certainly sure that Bernanke knew where the taxpayer money was directly going.

    You are contradicting yourself. Either Bernanke is using taxes to finance the bailout, in which case you have no inflation or he is printing money. If that causes inflation that defeats the whole purpose of the “evil conspiracy.”

    DJC: Now how does the corporate welfare bailout of Goldman Sachs help the American taxpayer straining to feed the family?

    First you answer my question, before we go off to another totally unrelated question. You claim that Bernanke is setting up the US for hyperinflation. My question here is how would this benefit Goldman-Sachs and Citigroup who you think run the US Treasury.

    If you concede that the ultimate cost is going to be borne by US taxpayers then this presumes no inflation.

    In any case, most taxes come from the wealthy so if we have to finance this by increasing taxes on people that make $250,000+, that sounds good to me.

  • Posted by Glen M

    Twofish,

    I am well versed in the realities of legal interpretations. Despite that, the fact remains that China is the target of the vast majority of investigations by the USITC. Also, keep in mind, the same realities that subjugate literal enforcement of GATT rules will, eventually, force US politicians to address the resultant job losses. As such the pendulum will just as easily swing the other way.

  • Posted by Twofish

    Glen M: Despite that, the fact remains that China is the target of the vast majority of investigations by the USITC.

    Which means absolutely nothing. As part of China’s WTO accession it agreed to allow nations to put under special scrutiny.

    There is a specific Congressional act 19 USC 2451 that authorizes USITC to investigate and take countervailing measures against Chinese dumping, and China agreed to this special treatment in Annex 16 of its access protocol see (WT/L/432). This special treatment would likely be totally illegal if China didn’t agree to it.

    Now the question is whether or not these sort of investigations every lead to anything, and they don’t. USITC has only approved a very few petition, which goes to the President who promptly tosses the petition and the report in the trash can.

    China likely agreed to being a special target precisely because they knew that the investigations would come to nothing.

    Glen M: Also, keep in mind, the same realities that subjugate literal enforcement of GATT rules will, eventually, force US politicians to address the resultant job losses.

    I doubt it. There have been more job gains from trade than losses, and as long as that is true, you aren’t going to see too many complaints. If nothing has been done over the last decade, I don’t see anything new happening especially since the trade deficit is going down, China is moving away from exports, and China is the source of major markets (it’s practically the only place in the world that GM is making money).

    The only industry that has every gotten anywhere with limiting China trade is the textiles industry, and one thing about trade negotiations is that you can use divide and conquer tactics. Once cotton underwear manufacturers get what they want, they don’t care how many steel workers lose their jobs, and vice versa. The WTO negotiation process encourages this sort of industry specific approach to trade.

  • Posted by Glen M

    Twofish: There have been more job gains from trade than losses, and as long as that is true, you aren’t going to see too many complaints.

    I keep hearing this. Can you provide any statistical backup?

  • Posted by Twofish

    Glen M: I keep hearing this. Can you provide any statistical backup?

    The trouble with statistics is that you can basically massage them to get any number you want, and a lot of times you end up adding apples and oranges.

    Also, it really doesn’t matter. People don’t care how many jobs get created or lost by trade as much as they care about whether *their* job gets hit.

    I can provide anecdotal evidence for this in that the industries I’ve been involved in (finance and high technology) are very heavily involved in trade, particularly Chinese trade, and we can look at employment numbers for those areas. Also we can look at Congressional voting patterns on trade bills which correlate very strongly with job gains and losses in their district.

    I can certainly say that I’m not going to vote for anyone that wants general trade restrictions because it would kill my job. We can then look at statistics and voting patterns to see if I’m unique or not, and I don’t think I am.

  • Posted by Twofish

    The other thing with statistics is the “pounding rubble” problem. Suppose Chinese trade completely destroys an industry, low end electronics assembly for example. All the US workers lose their jobs, find new ones, and once they found the new jobs, they don’t care that much that they lost their old jobs.

    There is no one lobbying to protect low-end electronic assembly in the United States, because there is no low-end electronic assembly in the United States. It’s all moved to China. Once an industry is dead, no one complains. If someone that was once employed in that industry gets another job (say working for Walmart), at that point their political stance will change.

    So if Chinese trade destroyed 1 million US jobs in 2001, but created 900,000 in 2003, then what you end up is 900,000 in favor of trade and 100,000 against it. At which people campaigning against trade is political suicide in most areas of the US.

  • Posted by DOR

    Ying: “China has the capacity to produce but no money.”
    –Nonsense. China is awash with money.

    “The cost to buy a sweater in US is almost the same as the cost to buy it in China.”
    –Nonsense. The difference is about 10:1