Going into last week’s U.S.-China Strategic and Economic Dialogue (S&ED) a key issue was China’s ongoing currency manipulation. This matters. A February study by the Economic Policy Institute (EPI) showed that China’s currency manipulation costs between 2.3 and 5.8 million U.S. jobs, increases the trade deficit by as much as $500 billion, and cuts U.S. GDP by up to $720 billion per year.
Treasury Secretary Jack Lew said going into the S&ED the Chinese currency remains “undervalued,” and that he would “press” China to do something about it. (An April 2014 Treasury Department report said the Chinese yuan “remains significantly undervalued.”)
Sen. Sherrod Brown (D-Ohio) was one of several lawmakers who called on the Obama administration “to take immediate and necessary actions to crack down on currency manipulation.” (Brown also released a fact sheet on the U.S.-China relationship that is worth a look.)
So What Happened?
Last week China’s Finance Minister cleared everything up, saying China’s economic growth is still weak, so China will continue to manipulate its currency. Bloomberg News had the story, “China to Keep Intervening on Yuan, Finance Minister Says“:
China said it can’t stop intervention in the yuan because economic growth is too weak and capital flows aren’t steady enough to warrant changes.
“The U.S. side has repeatedly asked, in terms of exchange-rate policy, whether China needs to intervene any more,” Finance Minister Lou Jiwei said at a press briefing yesterday in Beijing during economic talks between the countries. “But for us, under the current situation, when the economy hasn’t recovered fully and when cross-border capital flows are not completely normal, we’ll continue” existing practices, he said.
The Wall Street Journal has more, in “U.S. Says It Won a Victory in China Currency Battle. Did It?”
During the Strategic and Economic Dialogue, senior Chinese officials took pains to say they weren’t giving up intervention. “When conditions permit, the PBOC will gradually reduce intervention,” Mr. Zhou said at a briefing. That formulation made it into the final statement of the two nations: China would “reduce foreign-exchange intervention as conditions permit,” the statement said. Trouble is, there was no definition of the conditions, meaning they could be either political or economic conditions, or whatever the Chinese deemed them to be. The loophole is about as large as the Pacific Ocean.
Finance Minister Lou Jiwei, who is taking on a Joe Biden, tell-it-like-it-is kind of role in Chinese politics, was blunter. “It is very difficult for us to completely refrain from foreign exchange market intervention,” he said in a Wednesday briefing.
Well, then. That clears that up. China will do as it pleases, to help its own economy. The U.S. should be smart and help its economy, too.
Here is something to keep an eye on. Aside from the need to climb significantly from its already-undervalued level, the Chinese currency should be climbing several percentage points a year on top of that, to reflect China’s ongoing trade imbalance and changes in the country’s economy. In other words, if it is, say, 30 percent undervalued, this means a year later it would be undervalued perhaps 35 percent for these reasons. So if you hear that the Chinese currency has risen a few points, or that it is “being allowed to rise and fall with the market,” remember that it should be rising a few points from any level, anyway, and “a few points” is not what is needed. It needs to be allowed to rise all the way to the appropriate market level. The result will be U.S.-made goods becoming more competitive in world markets, so jobs and factories return.
Michael Stumo writes at Tradereform.org:
For at least 10 years, the U.S. has asked China “pretty please… can you stop manipulating and undervaluing your renminbi?” China always says “No… we want to grow really fast so we won’t stop.”
Of course, they are growing really fast by sucking the economic and industrial life out of the U.S.
… The Administration has zero credibility when it tells Congress not to pass bills to assess countervailing duties on Chinese goods to neutralize the currency disadvantage. The Administration is batting .000.
The House should pass HR 1276 and the Senate should pass S 1114. These are the pending bills to counter global currency manipulation, not just with China, effectively. Merely begging other countries to “stop doing that” simply doesn’t work.
(See “What Is Currency Manipulation?“)