Fri Apr 2nd, 2010 at 04:40:40 AM EST
Quite a kerfuffle going on about Chinese exports, internal consumption, and currency, no doubt because the US Treasury will publish in mid-April its annual report on other countries' currency policies, in which it may brandish against China the dread category of "currency manipulator". (Not as if the US hasn't long been complicit in the renminbi's dollar peg, but I digress).
Op-eds from Stephen Roach and Jim O'Neill in the FT, cited here recently in the Salon, have offered a position in which China is seen as essentially a future importer, and/or the renminbi is seen as correctly situated with respect to other currencies. Move along, no problems here...
Nouriel Roubini, in an email newsletter excerpting his analysis The U.S.-China Currency and Trade Collision Course (subscribers only), says:
...every year, the United States bases the decision of whether to label China a currency manipulator more on politics than on economic facts...
...There is no doubt that China is manipulating its currency: After re-pegging to the U.S. dollar in the summer of 2008 and accumulating about US$400 billion dollar a year of additional FX reserves (which now stand, in total, near US$2.4 trillion), there is no doubt, from an economic standpoint, that manipulation is taking place. It looks like a duck and acts like a duck—it is clearly a Peking duck.
Hmm, ha-ha, but read on for more of Roubini's case against China's foreign exchange policy...
This year, several factors have increased the likelihood that China will be branded a currency manipulator. First, the U.S. unemployment rate is at almost 10%, and 17% if you include underemployed and discouraged workers. Second, three quarters of the China trade surplus is with the United States. Third, China re-pegged about 20 months ago and shows no signs of wanting to change its currency policy. Fourth, the political pressure from Congress to get tough on China is at an all-time high: A bipartisan group of 130 representatives have signed a letter arguing that it is time to label China a currency manipulator. Meanwhile, the number of protectionist bills against China in Congress is rising. Fifth, in spite of sharply rising unemployment during the recession, the U.S. refrained from taking sharp protectionist actions. The only clear and explicit case of such protectionism was the case against imports of Chinese tires, a fairly minor trade action given the severity of the U.S. recession. In the U.S. view, China abused this restraint by maintaining the peg and increasing its global trade market share, violating the open-trading system and the WTO regime by not showing flexibility on the currency issue to attempt to rectify the trade imbalances.
The sixth and most important reason China is more likely than ever to get the manipulator stamp: The U.S. administration feels that the policy of keeping quiet on China and engaging its leaders privately has failed. The U.S. grudgingly accepted for a while that China was bound to re-peg in the middle of the economic and financial storm of 2008-09, as it was rapidly losing exports and experiencing a sharp growth slowdown. In fact, had China not pegged, the RMB might have depreciated. But by late 2009, China's aggressive policy actions had led to a rapid resumption of economic and export growth and rising inflationary pressures that could have been contained in part via currency appreciation. Thus, one would have expected China to start—or at least start signaling—the resumption of slow appreciation of the RMB. Instead, when Barack Obama went to China late last year he was effectively told to take a hike on the currency issue. He was ridiculed by the Chinese for the U.S. fiscal and current account deficits, as well as the accumulation of public and foreign debt. So it was only after months of quiet diplomacy failed to nudge the Chinese to move that the U.S. administration's patience ran out, and the White House and Congress became publicly vocal on the currency issue.
And Roubini cites, among others, Paul Krugman as being a tough-on-China advocate.
Should we get tough on China? Can we? What methods would be efficient?