Monday, January 26, 2009

Is China Manipulating the Yuan? Should We Care?

According to Treasury Secretary Timothy Geithner (in his testimony before the Senate Finance Committee):

President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices. While in the U.S. Senate he cosponsored tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles. The question is how and when to broach the subject in order to do more good than harm.

Q1: Why does everybody complain that China "manipulates" its currency, but nobody complains that Hong Kong "manipulates" its currency, even though Hong Kong has used a currency board to fix the Hong Kong dollar at the same level for the last 25 years (see chart above back to 2000 - Hong Kong dollar has been at the same level since 1984)?

Q2: Is it fair to accuse China of "manipulating" its currency when the yuan has appreciated by -17% since 2005 (see chart above)?

Q3: If China is "manipulating" its currency, the manipulation is to keep the dollar artificially high. Why should we complain about a strong dollar, when that translates into lower dollar prices for American consumers and businesses buying Chinese products? What if China sent us its goods for free, as a form of foreign aid? That would be even better than an artificially strong dollar, but an artificially high dollar and "everyday low prices" for China's products aren't so bad.

9 Comments:

At 1/26/2009 11:21 PM, Blogger Erik said...

Since your exports are about half of your imports, and your debts increase each year, you are giving China an increasing stack of dollars and hence the power to decrease the dollar the day they want to start using these. So, yes, indeed, you should care.

 
At 1/26/2009 11:43 PM, Anonymous EJ said...

What i find so hilariously contradictory, is that obama implicitly wants China to stop buying dollar denominated bonds, as this is how China depresses the yuan against the dollar, by selling yuan and buying us bonds with dollars. While at the same time he is advocating fiscal policy that would create a deficit approaching $2 trillion that will be required to be financed in part by China! So which way do they want it? They don't want China buying US government bonds, but they want them to finance US debt!

Am I the only one who sees this?

 
At 1/27/2009 12:16 AM, Blogger montestruc said...

I had a thought when I looked at the graph, maybe the US government is accusing China of manipulating the yuan to hide the fact that we are manipulating the US$ by the bailout, and "stimulus".

I would not even be surprised to find out that this was by agreement with the leaders in China who will together with the Obama people put together a nice puppet show to amuse the American and Chinese people.

 
At 1/27/2009 3:00 AM, Blogger @sethstorm said...

Well, that country ensures that it continues to keep taking work from first-world countries, yes on both counts.

If it can be used to remove junk and to strengthen laws that keep work here, then go right ahead. I don't see much friendliness with the nation of "thugs who make junk" with the Obama administration.

 
At 1/27/2009 5:00 AM, Blogger PeakTrader said...

China needs the U.S. more than the U.S. needs China. That's why the U.S. was able to capture increasingly greater gains of trade. It doesn't seem Obama understands trade relationships, including with oil exporters, e.g. Saudi Arabia.

Liberals, in the media, government, business, etc. want you to believe this recession is equivalent to the Great Depression. Once the American people are convinced, then big government, not the free market, will be the solution to all our major problems. The great conspiracy is to convince the American people the free market is a failure and government will actually solve our problems.

Liberals have little confidence and much ignorance of the free market system. They believe the world is on the verge of a catastrophe. Global warming, peak oil, rising food prices, etc. will not be solved by the free market. Government has to create massive programs to prevent these inevitable catastrophes.

The solution is to accept a lower standard of living. We need to create millions of jobs by creating inefficiencies, and work harder and longer for fewer and smaller assets and goods. The days of large houses, large autos, etc. for ordinary Americans are over. Big government is now in control.

 
At 1/27/2009 5:46 AM, Blogger @sethstorm said...


China needs the U.S. more than the U.S. needs China.


That is more of a reason to drive a harder bargain, and to follow through with any economic threats made against them.

Structure it in a way that doesn't just divert to another Third World country.

 
At 1/27/2009 12:54 PM, Anonymous Anonymous said...

i would like to see you weigh in (if you haven't already) on what would happen if one economy like the US would anchor their currency to gold or to a basket of goods . . . and another, like China, arbitrarily manages theirs. would their necessarily be trade repercussions? and if so, to whose benefit?

 
At 1/27/2009 1:09 PM, Blogger Brad Evans said...

Any attempt to manipulate trade, by controlling the exchange rate, by erecting trade barriers, by whatever, will have negative overall general effects for the country instituting these measures and benefits for other countries. The problem is that a person supporting these types of measures will point to a segment of the economy and say Look, these people are better or worse off. They will then try to conclude that currency manipulation or trade barriers are beneficial. You see the benefit only if you consider the whole economy, importers and exporters.

 
At 1/27/2009 3:48 PM, Anonymous LoneSnark said...

Anonymous, price fixing usually has negative results. As such, just as China pegging its currency to the U.S. dollar has made the Chinese people poorer than they otherwise would be, pegging the U.S. dollar to the world commodity Gold would make Americans poorer than they otherwise would be.

 

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