China: Currency Manipulator?
I was reading this story on the BBC yesterday about US factories closing and moving to China.
In the small town of Cary, near Chicago, you can see American industry being dismantled in front of your eyes.
Doug Bartlett’s factory used to make electronic circuit boards. But orders collapsed as the recession took hold.
The factory shut in March with the loss of 87 jobs. Now the wrecking crew is in and the factory is being gutted.
“It hurts,” says Doug. “You hate to see the people laid off.”
Doug is selling off all the usable machinery. He blames the death of his business on unfair competition from the Chinese, accusing them of artificially devaluing their currency to undercut American goods.
“You have to stop the Chinese from cheating,” he says.
“We’re not only watching the dismantling of my company, we’re also watching the dismantling of the circuit board industry in the United States and the dismantling of American industrial might.”
This notion that ‘China is cheating’, is quite interesting. To be clear, the charge is that China is deliberately intervening in the currency markets to keep the value of the Renmimbi artificially low and hence Chinese exports competitive. The usual evidence for this is the vast stock of US bonds the People’s Bank of China (operating through SAFE – the State Administration for Foreign Exchange) has acquired over the last few years.
Danny Quah, Head of the Economics Department at the LSE and a man who certainly knows what he’s talking about, gave a strong argument against this received wisdom in a comment on a post here last week:
First, certainly SAFE buys considerable quantities of US dollars – but is that intervention? Or is it just the result of an after-the-fact imprudent faith in the continued strength of the US dollar? And remember it is not just China whose official coffers and portfolios fill to overflowing with US dollars. Japan comes a close second. And the UK, a surprising third, is estimated to hold nearly two-thirds of the amount China does in US Treasury bonds.
Second, perhaps more critical, as you saw from my blog post
it is not just China that has been running large bilateral surpluses against the US (and thus resulting from whatever rate the RMB has gotten to, through SAFE’s actions). The EU and the oil-exporting countries have seen bilateral surpluses against the US of about the same magnitude and dynamics as China’s – it has got to be a strain to say that those trade surpluses against the US derive from SAFE’s interventions to keep down the RMB.
I’m starting to change my view on this one. I have long been firmly of the view thhat the Chinese model was dependent upon exports and so ‘currency cheating’ made sense as a model. John Ross is doing a good job of persuading me that exports are not the driver of growth, whihc combined with Danny’s argument’s above force me to reconsider.
This debate the issue of ‘cheating’ is more than a economic argument. It is also a political issue.
WASHINGTON, Jan 21 (Reuters) – President Barack Obama is committed to pressing China on its currency practices, which are a major concern for the both United States and the global economy, U.S. Treasury Secretary-designate Timothy Geithner said on Wednesday.
Geithner was asked at his Senate Finance Committee confirmation hearing whether he thought China’s “manipulation” of its currency remained a serious concern.
“I do believe it is a significant issue,” he told Sen. Jim Bunning, a Kentucky Republican who has sponsored legislation to press China to move a more flexible exchange rate policy.
“As I said earlier, I believe it is important for the United States and the global economy that our major trading partners operate with a flexible exchange rate system and that market forces determine the level of those exchange rates,” Geithner said.
The issue is of course more complex than the simple ‘is China cheating’? As Danny Quah has noted talk of ‘excessive Asian savings’ is perhaps a Western Centric term. It is unusual to blame the lender in a debt crisis and not the borrower. We don’t hear as much talk of ‘Excessive Western Consumption’.
Could the same argument not be made on this issue? We hear a lot of talk of ‘Chinese currency manipulation’ but less complaints that ‘the US has been running an ever widening deficit for the best part of 30 years (with notable exceptions in the Clinton period), they can’t complain that someone is still buying their debt’.
I’m increasing moving towards a policy of ‘blame global imbalances’. I think that Asia (and the petro-states amongst others) have saved too much, they have been too reliant on exports and maybe as part of an export dependence and high savings they have ‘influenced heavily’ the value of their currencies.
But the flip side of that is that the West has spent too much, been too reliant on consumption as a driver of growth and gotten into too much debt.
Both sides are to blame and an argument as to who started it is entirely irrelevant. The agenda now must be a way to find a more balanced version of global growth.