Global Crisis Blog

Don’t Laugh:   “US Toughens Tone on Chinese Currency”

By Shlomo Maital

     That headline is real. It is from the Global New York Times, Sept. 17, p. 15.

     The gist is this:  America is this time, for real, we’re not kidding, better take us seriously, make no mistake, this isn’t playing games, we mean business,  …. getting tough with China regarding its manipulation of the renminbi.

    What manipulation?

    Perhaps, the manipulation that involves China buying $1 b. DAILY of dollar-denominated securities, or $365  b. annually, to keep its exchange rate from appreciating, and thus making its exports more expensive.  Perhaps, the manipulation that keeps China’s exchange rate today at RMB 6.83 per US dollar, compared to RMB 6.95 in 2008,  a level that according to The Economist and even The World Bank and IMF,  undervalues China’s currency by about 50 percent (that is, the true economic exchange rate would be about RMB 3.5 per dollar, if the exchange rate were allowed to be determined by market forces alone, without the Bank of China).  Perhaps the manipulation in which China has accumulated way over $2 trillion in reserves through daily purchase of dollar assets. 

     If China’s exchange rate were indeed allowed to rise to RMB 3.5 per dollar, suddenly all its exports would cost double.  Perhaps then global rebalancing could begin – with fewer goods flowing out of China, and more goods flowing into it. 

   For how long has China’s Renminbi been undervalued?  Would you believe 15 years?  The exchange rate was RMB 8.35 per dollar in 1995.  It stayed at that level until 2004.  The exchange rate was then allowed to appreciate very very slowly and gently, to RMB 8.19 (2005), 7.97 (2006), 7.61 (2007), 6.95 (2008) and 6.83 (2009).  At that rate,  excruciatingly slow Chinese ‘water torture’,  global rebalancing will be completed by the year  ….  6583.   

    U.S. Treasury Secretary Timothy Geithner is talking really tough. The Treasury “would take China’s actions into account as we prepare the next Foreign Exchange Report”, he said; the Report is due Oct. 15.  America is threatening to declare China a currency manipulator!  China?  I have no doubt the entire nation is shivering with fear.  

    Wake up, America. China has been manipulating its currency for 15 years. And you,  America,  you are an active partner in crime, because you have been living beyond your means with the money China lends you and loving it, and you still are, and there is no real sign whatsoever that your politicians are willing to even begin inflicting the pain (lower living standards) that is required to end this impossible situation.  

    So, forgive me if I read the headline and chuckle sadly.  The last President who talked tough to a trading partner was Ronald Reagan, who read the Riot Act to Japan in the 1980’s. Since then, they’ve all been marshmallows.  The result: Global disaster and America’s hollow economy that is unable to create new jobs.