China Currency Shift: Getting Worse More Slowly

Dave Johnson

There are rumors that China will let its currency start to rise a tiny bit. China’s currency undervalued by up to 40%, which means goods made there have as much as a 40% advantage coming out of the gate, even before their other rulebreaking trade schemes kick in. Since their currency should appreciate quite a bit from where it is now over the next year anyway a small rise in their currency actually does less than nothing. So for example, if they appreciate their currency 3% that means they start with a 40% advantage out the gate, and a year form now they’ll be at maybe 42%! It just means the situation will get worse more slowly.

From a NY Times story today, China Seems Set to Loosen Hold on Its Currency

The Chinese government is preparing to announce in the coming days that it will allow its currency to strengthen slightly and vary more from day to day, people with knowledge of the emerging consensus in Beijing said on Thursday. The move would help ease tension with the Obama administration about the United States’ huge trade deficit with China.

China, of course, has no intention of changing its mercantilist policies. Unfair advantages are bringing home the bacon (and cost us 2.4 million manufacturing jobs) and they want to keep it that way. Commerce Secretary Gary Locke says that their trade barriers might undercut any currency shift.

U.S. Commerce Secretary Gary Locke said China should allow the yuan to float, even though import barriers may undercut any boost for American exporters from a revaluation.

“Sometimes it’s like two steps forward and one step backwards, or two steps sideways” when dealing with China, Locke said in a Bloomberg Television interview. “They can revalue their currency, but if they still have market barriers or if they favor their domestic companies, then that revaluation of the currency will not make much of a difference.”

Even this small currency change is is only being done to ease internal pressures, not to help ease the tremendous imbalances their policies are causing. From the NY Times story,

The move is being made for domestic policy reasons in China, primarily as an inflation-fighting tool, people with knowledge of the emerging consensus in Beijing said on Thursday. While any announcement could still be delayed, China’s central bank appears to have prevailed with its arguments within the Chinese leadership for a stronger but more flexible currency, these people said.

The internal pressure are rising because China is devoting a huge share of its GDP just to currency manipulation,

Holding down the value of the renminbi through huge currency market intervention has become an enormous expense for China. The central bank spent 9.2 percent of the country’s economic output last year on the purchase of foreign reserves, mainly Treasuries that are now paying low interest.

The NY Times asked a few economists to weigh in, in What China’s Currency Shift Could Mean. Take a look.

Call your representatives and tell them you demand that they take steps to fight Chinese trade rulebreaking. Keep up the pressure.

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