China As A Currency Manipulator: The Elephant In The Room
Let’s rewind two years, to a time before ‘credit crunch’, ‘quantitative easing’, ‘TARP’ or ‘staycation’ had entered the popular vocabulary. I’m talking about a time in which the term ‘currency manipulator’ was part of the zeitgeist of US-China economic relations. Today, G20 summits come and go without this phrase, which once seemed almost ubiquitous, being uttered. So, why has the discussion of China’s CNY/US$ currency peg all but fallen off the radar?
Exchange Rate, CNY/US$
The most obvious answer is that the US has better things to be worrying about. The near collapse of the US and global financial system, together with the worst recession since the Great Depression, has moved the economic debate onto rebuilding the domestic institutional framework, and how the federal government can stimulate the economy. Moreover, the sharp global recession has unwound some of the imbalances that yuan appreciation would have solved. The US trade deficit has shrunk, China’s trade surplus has fallen, and commodity prices are still well down from their peaks. Chinese liquidity is also needed to help get the global economy back on its feet.
So, with the realpolitik at present weighing against further US government pressure for a revaluation of the yuan, the domestic political case for pushing Beijing has also faltered. Whereas it was once good politics to blame Chinese manufacturers for the disappearance of US manufacturing jobs (albeit to little real effect), a new bogeyman has appeared. And he is called the investment banker.
For right or for wrong, investment banks are shouldering the bulk of the blame for the credit crunch. This is politically expedient for politicians, since this is something that they can be seen to be doing something about. New regulation is easy to pass, while taxes can, with a little more difficulty, be heaped upon the finance sector. These points aside, there are two key issues which are conveniently being forgotten, especially in the Anglo-Saxon world.
First, it was not bankers who created the excess liquidity which caused the asset price bubble in the first place. Certainly, the poor ratings models and inadequate credit controls were major issues – along with G7 fiscal and monetary policy imprudence – but it was China’s currency peg which resulted in Beijing amassing huge dollar holdings. These in turn were recycled through Western banks and bond markets. When the Western consumer could take no more debt from late 2007 onward, this trend, as much as anything, caused the credit crunch.
Exchange Rate, CNY/EUR
Second, the underlying asymmetries resulting from the CNY/US$ peg have not vanished. They are merely concealed. The dollar-yuan exchange rate has barely moved from the CNY6.83/US$ area since mid-2008, and the recent bout of dollar weakness has seen the euro and the Japanese yen soak up most of the pain. By contrast, China has seen its currency slump against the currencies of nearly every one of its developed world and Asian competitors. Once global consumption picks up again, the Chinese yuan will still be undervalued, and will start running up massive surpluses again, albeit at slightly lower levels than at the peak of the last boom.
It is my view that the elephant in the room, which is the yuan peg, will once more come into focus. However, trying to force China to act on exchange rate policy before they are good and ready is likely to be fruitless. Beijing continues – unsurprisingly – to see Chinese jobs in export industries as more important than US worries. The risk is that China’s ongoing intransigence will be met by more US import duties (think Chinese tyres), which will make the global recovery harder, not easier.
