March 22nd 2010
Chinese Yuan Controversy Heats Up
Over the last couple weeks, rising expectations of a resumed appreciation of the Chinese Yuan (RMB) have brought heightened tension. Politicians, economists, and even newspaper columnists are finding themselves involved in increasingly bitter disputes over the issue. What’s more, the debate has regressed; whereas before it was a foregone conclusion that China would soon lift the peg and the only question was when, now people are once again asking themselves whether an RMB revaluation is even necessary/desirable.
Breaking with his old strategy (on multiple fronts, it should be noted) of soft speech and appeasement, President Obama is now openly calling on China to allow the RMB to appreciate: “Countries with external deficits need to save and export more. Countries with external surpluses need to boost consumption and domestic demand. As I’ve said before, China moving to a more market-oriented exchange rate would make an essential contribution to that global rebalancing effort.” While this would seem like a fairly mundane exhortation, it marks a strong break from Obama’s previous rhetorical approach, in which he generally avoided singling out China.
Meanwhile, the US Treasury Department is busy preparing its semi-annual report on foreign currencies, which will be presented to the US Congress on April 15. As usual, the media is focused on the portion concerning China, specifically with whether it is officially labelled a currency manipulator. Almost by definition, China manipulates the Yuan, but the Treasury Department has heretofore avoided the label because it would allow Congress to impose punitive trade sanctions. Ironically, the most pressure to bestow such a label is coming from Congress, itself.
Aside from the report, Congress is not sitting by idly, as evidenced by a recent letter to the President signed by 130 Representatives calling for action. The Senate is also busy with draft legislation that would place a 25-40% tariff on all imports from China unless the RMB is revalued by a similar percentage. “The senators said the U.S. recession could boost the political prospects for the legislation, which [Charles] Schumer has proposed in various forms since 2003. Schumer said the Senate proposal will be attached ‘very soon’ as an amendment to ‘must-pass legislation. The only way we will change them is by forcing them to change.’ ” Perhaps the economic recession has put things in perspective, and the legislation finally has the impetus needed to pass.
Chinese government officials continue to send conflicting signals. No less than China’s premier (the #2 man behind only the Prime Minister) Wen JiaBao, told reporters with a straight face that China doesn’t manipulate the Yuan and that in fact, it is other countries which are guilty of such a crime. Added another high-ranking official, “We don’t agree with politicising the renminbi [yuan] exchange rate issue.” On the other hand, Zhou XiaoChuan, head of the Central Bank of China “broke new ground by stating that exiting the stimulus would sooner or later spell the end of the ‘special yuan policy’ adopted to counter the financial crisis.” Evidently, the currency peg is interfering with the ability to conduct monetary policy, specifically by raising rates to fight inflation. As if the position of the government wasn’t muddled enough, the Ministry of Commerce is now running “stress-tests” on large exporters to see how they would fare in the event of a large revaluation.
Economists are also getting into the fray, with Nobel Laureate and NY Times columnist Paul Krugman editorializing that China’s Yuan policy “seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.” Morgan Stanley’s Chief Asia economist, Stephen Roach, reacted to this accusation by suggesting inexplicably that, “We should take out the baseball bat on Paul Krugman.” This set off a heated back-and-forth (conducted indirectly through other reporters) between the two economists, ultimately accomplishing nothing other than to bring added attention to the issue of the Yuan.
At this point, everyone – except for Stephen Roach and the WSJ editorial board – seems to agree that a revaluation would benefit everyone. “I basically think that making the yuan flexible would be positive, not only for the world’s economy, but also for China’s. Many of China’s neighbors seem to have questions about the dollar peg,” summarized a vice Finance Minister of Japan. Chinese officials accept and even share that view, and from their point of view, the revaluation is only a matter of being able to do so on their own terms. As with many things in China (coming from someone who lives there), it’s important to save face.