October 16, 2012
Against a Sea of Enemies: China as Currency Manipulator
One of the interesting things about the presidential debate tonight was the prominence of China. Governor Romney repeated his insistence that he would declare China a currency manipulator "on day one". (I am surprised he didn't mention the "yellow peril".) If his criterion is forex intervention, he should be prepared to declare many other countries manipulators as well.
Figure 1: Log real trade weighted Chinese yuan (blue, left scale), and value of Chinese yuan against USD (red, right scale); value for 10/16 (red triangle). A rise is a Chinese currency appreciation. Source: BIS and FRED.
That's because the Chinese currency has been appreciating, and the degree of estimated undervaluation has decreased over time. Even the Peterson Institute for International Economics, which has been adamant historically, recently estimated a 3% undervaluation. 
“Debbie spend so much American money, you borrow more and more from us,” says a young Asian woman riding her bike through rice paddies at the beginning of the 30-second ad. “You’re economy get very weak. Ours get very good. We take your jobs. Thank you Debbie ‘Spend It Now.’”
For me, this is reprehensible. I am confident that others believe this is perfectly appropriate.
Posted by Menzie Chinn at October 16, 2012 09:11 PMdigg this | reddit
While we can agree that focus on China's currency manipulation may not be the most pressing issue (arguably interest rate, export promotion, and indirect govt supports are more problematic) it is incorrect to argue that it doesn't matter. From a geo-political standpoint, the practicality of focusing on the currency issue may trump the economic analysis of which is the bigger problem, because currency manipulation is easier for the electorate to understand, identify with, and ultimately rally around.
Put it this way: in a debate in front of a non-expert audience, would you rather argue for "getting tough on China" by focusing on one big issue (Currency) or myriad small issues (interest rates, land pricing, tax rebates, implicit govt guarantees etc etc). I think the answer should be obvious.
Finally, while it is technically true that Swiss and Israel could just as easily be called currency manipulators, I would contend that this kind of argumentation misses the forest for the trees. Clearly Swiss/Israeli industries do not have the scale/ambition/motive/potential to threaten American economic interests in the same way that China does. Therefore arguments that conflate the two are not particularly relevant (although I don't doubt their satisfaction value to the economists who make them.)
To again put it simply, which side would you rather debate for: China is the major economic competitor to America vs Swiss/Israel are the major economic competitors to America?
I'm making a value judgment here so you are free to disagree, but what I think we need to do at this point is focus on how to get US-China trade more in balance. If it is more geo-politically effective (as a function of generating domestic support and in picking a target with leverage) to focus on the currency issue instead of other issues, then by all means use the currency issue. If China balks at making real concessions (as presumably they would), then the strategy can naturally shift to requesting concessions on those other more meaningful issues.
Put it this way: in a debate in front of a non-expert audience, would you rather argue for "getting tough on China" by focusing on one big issue (Currency) or myriad small issues (interest rates, land pricing, tax rebates, implicit govt garuntees etc etc). I think the answer should be obvious.
Finally, while it is technically true that Swiss and Isreal could just as easily be called currency manipulators, I would contend that this kind of argumentation misses the forest for the trees. Clearly Swiss/Israeli industies do not have the scale/ambition/motive/potential to threaten American economic interests in the same way that China does. Therefor arguments that conflate the two are not particurally relevant (although I don't doubt their satisfaction value to the economists who make them.)
To again put it simply, which side would you rather debate for: China is the major economic competitor to America vs Swiss/Israel are the major economic competitors to America?
I'm making a value judement here so you are free to disagree, but what I think we need to do at this point is focus on how to get US-China trade more in balance. If it is more geo-politically effective (as a function of generating domestic support and in picking a target with leverage) to focus on the currency issue instead of other issues, then by all means use the currency issue. If China balks at making real concessions (as presumably they would), then the strategy can naturally shift to requesting concessions on those other more meaningful issues.
Posted by: Vernierengine at October 16, 2012 10:03 PM
It is difficult to remember, when currencies exchange rates have been a mechanism of transmission of anything. They more look like a policy of extreme last resort, the USD dollar, the Pound were and are manipulated and so was the deutsche mark before being a constituent of the euro and de facto so are the constituents of the euro..
As for China, liquidities and foreign exchanges look like intertwined .A familiar landscape where the sensitivity lies between offshore financial resources and onshore uses of funds that is well retraced by the BIS report
Internationalisation of the renminbi - Bank for International Settlements
« This dominance of the offshore market by borrowers of domestic origin
(mainland banks and firms or their offshore subsidiaries) is a very unusual trait
(Graph 4). Whereas 80% of renminbi issuers are of Chinese nationality,
only 30–60% of issuers in other offshore markets are nationals of the currency’s
country of issue. For non-financial issuers, however, the offshore renminbi
bond market is less out of line with the international experience. »
Robert Mc Cauley in the same paper is prompt to underline that the timing of the Rmb appreciation is an agenda where currencies mismatches, assets and liabilities may well be the key drivers.
Liquidities may drive organized defaults and surprisingly from cash rich state borrowers or state participation projects. Wholesale lenders, underwriters will be led to check the difference between dividends repatriations and working capital, exequaturs jurisdictions and associated costs will be reviewed against patience.
As for the targeted current accounts as exhibited P3 of the paper « Peterson institute of international economics« , they may need explanatory comments when cross checked against actual (cf IMF statistical data on countries current accounts)
Posted by: ppcm at October 17, 2012 01:44 AM
After the debate I did not want to vote for either candidate. Romney started off with two stupid answers and Obama just climbed on the stupidity wagon and they both rode into the sunset arguing over which one would make the dumbest mistakea.
Romney's approach to China is probably the worst and most uninformed position he takes. One of my problems with Romney is that when he says something he actually means it. That means that when he is president next year he will declare China a currency manipulator.
For the first half of the 20th Century the United Kingdom was the worlds worst currency manipulator, but since FDR the US has passed the worst manipulations by a mile. From WWII until the 1970s the US inflated the world currencies taking value for itself. When De Gaulle pushed back against US monetary manipulation the monetary experts whinned like kids caught with their hands in the cookie jar.
The Richard Nixon sealed the deal by betraying the whole world admitting US intransigence by breaking the promise to hold the dollar at $35/oz of gold then sticking the nations of the world with the bill for US debt.
Since then the US government has raped not only the nations of the world but the US citizens who hold the most dollars.
So for Mitt Romney and Barak Obama to call China a currency manipulator when all China is doing is holding parity with the dollar is like Jack the Ripper blaming his victims for his atrocities.
Posted by: Ricardo at October 17, 2012 04:49 AM
The reason why Romney is right about this--and it's one of the few things he is right about, economically--is China's size. China is big enough to massively affect US industries and hollow out our manufacturing and middle class. Neither Switzerland nor Israel can have that effect, so they can fly below the radar.
The other reason, and this may be more important, is that the small countries' moves are determined given China's first move. If a nation like Vietnam or Brazil did not accumulate FX reserves, they'd be unable to sell anything in a world in which the yuan was massively undervalued. Thus they have to keep pace with China. So even though China represents only about a third of the world's FX reserves, their importance to the equilibrium exceeds that.
Posted by: Stephen at October 17, 2012 05:19 AM
Weird that Romney and Bernanke think alike - 10/15/2012: Ben Bernanke did not mention China by name in a speech in Tokyo, but it is hard to read the Federal Reserve chairman’s remarks without getting the sense they were aimed at policies keeping that country’s currency from appreciating too rapidly against the U.S. dollar.
Then there is Obama's policy statement-
...during his meeting with the Chinese Prime Minister, Obama reiterated his demand that China start addressing currency manipulation, and said the U.S. would consider a tariff on goods from China if no action was taken.
That was 3 years ago when the CNY was 8% higher than today.
It's all posturing anyway. In 2008, Obama ran on the same policy as Romney's current policy.
As a candidate in 2008, Obama also talked a tough game on China, which, like Romney in 2012, he labeled a currency manipulator. After the election, Treasury Secretary Tim Geithner affirmed this characterization, telling Senate during his confirmation hearing that he too believes China is manipulating its currency.
The real issue here is whether or not there has been a permanent change in Chinese policy regarding their currency. I don't think there has been, given Bernanke's statement, and the fact that Obama has not taking credit for it.
Posted by: tj at October 17, 2012 06:44 AM
Posted by: W.C. Varones at October 17, 2012 07:24 AM
I would have doubled down on China were I Romney and given a version of Clinton's "muscle jobs" speech, something like this:
"Everyone in this room who has an IRA, a 401k or an equity portfolio is directly or indirectly invested in China. That includes both the President and myself. If you own GM, GE, Citibank or Procter & Gamble, you are invested in China. That's where the growth is coming from for these companies.
"We can pretend that China doesn't exist. In terms of population, it would be as successful as Great Britain pretending the United States doesn't exist. China is a reality, it is large, and it is growing rapidly. Our prosperity depends not on hoping that China will go away, but adapting to it as both a customer and competitor.
"We have issues with China--currency, intellectual property, the South China Sea, Taiwan, and a desire for enhanced human rights there. But these are on-going, everyday issues for US policy and diplomacy. Over time, most of these will be managed if not resolved. Like the US, China is in its fundaments a commercial power. We will have challenges with China--some of these may be acute and antagonistic from time to time. And we'll take the appropriate steps. But we can have confidence that, with proper diplomacy and policy, these will be worked out over time.
"China's an incredibly important part of the global future. America doesn't want to run away or disengage--we expect shape events and prosper with China as it grows."
Posted by: Steven Kopits at October 17, 2012 07:48 AM
The comments - and the post - miss the humor: we've been hearing for years, since Obama took office, that reducing the debt is all important because we depend on China buying our bonds and they could stop and the dollar would collapse. (I'm not saying this is true; it reflects deep ignorance about who holds our debt, etc.) That has been a drumbeat. It has been covered in this blog.
Now all that is tossed out the window. Why? For another bit of mindless posturing: declare China a currency manipulator! Why? Well, to force them into line, to make them act better toward the US and ... wait, don't we need them to buy our bonds to keep the dollar from collapsing?
The humor is this: it's inane posturing. And the real humor is this: people fall for it. They talk about it like this is something important, like it's something that might happen, that maybe should happen. Never mind that yesterday the argument was we need China. Today's nonsense is different.
Posted by: jonathan at October 17, 2012 07:58 AM
US had a protective tariff from its earliest days until Wilson Administration. It raised money but also protected nascent manufacturing sector.McKinley actually got elected by selling the idea to workers that tariff protected jobs from foreign encroachment.
China's manipulation of currency is the modern equivalent of that I believe.
Posted by: John Jansen at October 17, 2012 09:32 AM
Whilst a little outdated those are figures as of 2010, they are self explanatory.
BIS triennial Central Banks survey Foreign exchange 2010
Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007, with average daily turnover of $4.0 trillion compared to $3.3 trillion.
The increase was driven by the 48% growth in turnover of spot transactions, which represent 37% of foreign exchange market turnover. Spot turnover rose to $1.5 trillion in April 2010 from $1.0 trillion in April 2007.
The relative ranking of foreign exchange trading centres has changed slightly from the previous survey. Banks located in the United Kingdom accounted for 36.7%, against 34.6% in 2007, of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).
Further reading of the OCC reports on derivatives and foreign exchange,may complete the data.
Posted by: ppcm at October 17, 2012 10:54 AM
I've read many times that the more potent subsidies would be the direct and various hidden subisidies that help Chinese exports.
So if the currency subsidy has been reduced from perhaps 30% to something much less, it is only 1/2 of the problem that has been addressed.
Since it is not "free trade" I think we should cease to ever refer to trade with China as "free trade."
Posted by: Hal Horvath at October 17, 2012 12:41 PM
China owes the US trillions.......I bet you people didn't know that. Puts the intellectual core into perspective and the lie it creates.
Posted by: The Rage at October 17, 2012 01:34 PM
Stephen: I agree that China's intervention also affects other countries' intervention (and hence exchange rates). In fact I have several blog posts to that effect, and stated that point in an IMF forum with PBoC Deputy Governor Yi Gang back in 2010. Yet, it still begs the question, why penalize China now, when the currency is arguably near equilibrium by both FEER and PPP/Income approaches, (this is for tj) the current account has shrunk considerably, and capital is flowing out of China (see WSJ).
tj: What was the Chinese CA in 2009? What is the current Chinese CA?
Stephen Kopits: Yes, we have very important issues with China, including as you say, intellectual property rights and defense issues. Let's deal with those issues in those spheres. Perhaps redeploy air-sea forces to the region...oh, that's been done already.
Posted by: Menzie Chinn at October 18, 2012 07:23 AM
What was the Chinese CA in 2009? What is the current Chinese CA?
Is the improvement due to cyclical changes or permanent policy changes. In other words, will China revert to the same old currency policy in the future? I honestly don't know the answer, that's why I am asking. It seems the answer to this question should guide U.S. trade policy with China.
As I said, both sides are just posturing anyway. China is an easy target. If the candidates couch the issue as isolationism and a tradeoff between more U.S. jobs vs higher prices for Apple I-Products, sugar, ethanol/gasoline, etc, no one would care. The U.S. already has as many, or more, barriers to trade than most of our trading partners, correct?
Posted by: tj at October 18, 2012 10:56 AM
tj: Re: cyclical versus trend, see this post. If we penalize China now for appreciation (and shrinking current account) now, wouldn't we be penalizing the behavior we want to encourage?
Since our major trading partners are Mexico and Canada, I'm not certain our trade barriers are higher than our trading partners (with respect to the RoW).
Posted by: Menzie Chinn at October 18, 2012 12:47 PM
Just one point -- the "Peterson study" was done by Cline and Williamson, two people who, if I call correctly, never thought the Great Reserve Accumulation or Chinese Currency manipulation mattered. So, this isn't a study by scholars who were previously hawkish turning dovish. This is a study by people who were previously wrong arguing that their previously wrong views have become correct.
Posted by: Thorstein Veblen at October 18, 2012 01:46 PM
One note about the cited Kline-Williamson study -- the US, which currently has a current account deficit in the neighborhood of $500 billion, which implies a full-employment/structural deficit of closer to $800 billion. They estimate that the US is 3% overvalued...
Posted by: Thorstein Veblen at October 18, 2012 02:17 PM
Menzie: "What was the Chinese CA in 2009? What is the current Chinese CA?"
How about what are the trends in the chinese CA with the EU and the trends in chinese CA with the USA?
Posted by: Get Rid of the Fed at October 18, 2012 02:28 PM
Get Rid of the Fed: I have no idea. Bilateral flows of net income, transfers, remittances, etc. necessary to calculate such a thing as a bilateral CA are not readily available.
Posted by: Menzie Chinn at October 19, 2012 05:05 PM
Menzie: I am surprised he didn't mention the "yellow peril".
I've grown accustomed to your liberal bias but implicit charges of racism go to far. So much so that I'm on the verge of unsubscribing.
If you can't trust the messenger then why read the message.
Posted by: Loren Thomas at October 21, 2012 09:58 AM
Loren Thomas: I regret that you will no longer be subscribing to Econbrowser.
As an aside, there is a "byline" at the end of each post, which allows you to differentiate between writers.
I will finally note that, had you commented on Governor Romney's allusions to "food stamp president", President Obama's birth certificate, and the topic of self-deportation and/or "undocumented illegals", I would be somewhat more convinced of your outrage.
Or are all these completely legitimate, non-racist, statements in your mind? If so, well, I feel sorry for you.
Posted by: Menzie Chinn at October 21, 2012 10:33 AM
Menzie Chinn, It seems to be quite clear that your view of economics is distorted by politics and support for the left of center along with the current president. To the point of playing the race card with a link too it you are practically calling the opposition racist or fascist.
If you cannot look at the history of macroeconomics and its various failings to predict the outcome of what has been done whether it be Keynesian which has been abused the past 5 administrations or more, or the failings of the Fed to understand how to use monetarist policy in a prudent way, please do not allow politics to obscure your view.
I suggest before you label the conservatives policy as some racist phenomenon you study the civil rights act history. Mass media will defer to LBJ the guns and butter inflation president that used the N word regularly and the subsequent passages of Civil Rights Acts of the 1960's.
If you go back 100 years plus and look a the first civil rights act written after the Declaration of Rights and Sentiments larger attended by women along with Fredrick Douglass in 1848 led too women's rights and freemen rights in the Civil Rights Act of 1866 which was not a perfect document that was altered by LBJ's signing of the 1968 one. However looking at whom was for it in 1864-1866 and whom was against it you might find to be quite interesting. The Democrat party has made a myth that they stand up for the minorities in the US. The Democrats have always stood up for labor unions even at the expense of minorities.
Sure there has always been some fear of foreign labor. Sometimes for good reason. I have seen jobs taken by lower wage earning foreign labor. Often argued by the Democrats as being jobs no one wants. The house building industry has been very subject to this which is primarily non union. Where as the unions will protect workers by seniority and thus are not effected by foreign labor that much other than the price of building cars etc abroad with no EPA and cheaper labor.
But that is a force globalization brought right here to the capitalism market of banks and builders.
Name the one thing the US is building and selling throughout the world other than defense products that is physical that has not become either compromised by foreign labor or the jobs have moved out of the country already.
The only reason China cannot build cars for the US market is they already build cars that knock-offs of Japanese cars and thus do not respect copyright or patent law.
Cisco found them selling routers in the US that were a copy of Cisco's routers and operating system.
The one thing answer is BAC or the Boeing commercial side planes. However the Honda has a 60 seater that is getting closer to our market. China has a 100 seater that is trying to get FAA approval now. That is getting closer to our market. The largest threat so far has been socialist subsidized Airbus or EADS.
China does not play by the same rules and the point the opposition candidate was making was that this needs to be dealt with whether he can or not just as the current one promised when he first ran for election along with a lot of other busted promises. China's manipulates its currency so that its exports stay cheaper. This is not competing its cheating. It hurts US jobs and our economy.
Posted by: Packet at October 21, 2012 10:52 AM
Please take a look at Sen. Sherrod Brown
viewpoint on China.
Posted by: Packet at October 21, 2012 10:54 AM
Packet: I would respond, but grammatical incoherence prevents me from understanding your points. Are commas too expensive to use?
Posted by: Menzie Chinn at October 21, 2012 03:10 PM
Thorstein Veblen: I beg to differ; see Cline (2005, 2007) as cited in this Peterson Institute brief.
Posted by: Menzie Chinn at October 21, 2012 03:16 PM
Your post kind of implies anyone who cries "foul" on China's bullying trade tactics (LIES) is "racist". I guess based on this type of overly sensitive analysis (or crutch used to rationalize the fact Chinese coastal exporters and Gov Bureaucrats cannot compete on flat plain with foreigners) about 80%+ of those who trade with China (i.e. non-USA) are all just "damned racists" and "dirty Laowai".
I don't like Romney anymore than you Menzie, I promise you, but the type crap you typed above looks like Chinese--Chinese type thinking and not American Chinese thinking (i.e. not brainwashed by State TV and state purified textbooks).
Menzie, PLEASE quit drinking the Kool-Aid served in Chinatown and come back to the land of critical thinking skills. Thanks
Posted by: Ted K at October 22, 2012 10:09 AM
Ted K: Thank you for your comments. Let me assure you, I do not now, nor have I ever lived, in a Chinatown. And, for the benefit of the Governor, I was born in the USA.
If you think China is not abiding by intellectual property right agreements, then bring sanctions in the WTO. If you think China is dumping, then pursue sanctions on that dimension. If you believe Chinese military ambitions need to be tempered (as I do), then re-allocate US military forces to the region. When the degree of undervaluation is arguably small, now seems an odd time to stress China's role in forex intervention -- without mentioning any other intervening countries, and promise to declare China a currency manipulator on the first day in office.
Perhaps I am eliding Pete Hoekstra's (R) views with Governor Romney's (not completely without basis [A]; I have added links as an update to the text). But I believe I am justified in being wary; after all, this is the man who mentioned "the food stamp president", questioned the birth certificate of the President, and argued for self-deportation (and Palestinian income differentials caused by culture).
In any event, I will venture to say that one is more sensitive to these sorts of allusions -- perhaps they are all completely benign -- when one is at the pointy end of the stick (metaphorically speaking of course, just to be clear).
Posted by: Menzie Chinn at October 22, 2012 10:37 AM
I have long since taken very seriously the writing of professional economists on China.
The simple and plain truth is that globalization is a disaster for anyone in the bottom 80%. Since I sat through the same lectures in grad school that every other economist has, I do not find it surprising that economists essentially try to find any other explanation for the disaster that has actually seen life expectancies decline in the US over the last 20 years for those in the bottom 20%.
The truth is the China versus Swiss versus Israeli discussion is nonsense. The real issue is the willful and deliberate effort by economists to minimize the effects on the middle class wrought by globalization.
Posted by: fladem at October 22, 2012 02:18 PM