RSS Feed MenuMartin Wolf yesterday on China’s currency manipulation:
Is China a currency manipulator? Yes. China has intervened on a gigantic scale to keep its exchange rate down. Between January 2000 and the end of last year, China’s foreign currency reserves rose by $2,240bn; after July 2008, when the renminbi’s gradual appreciation against the dollar – begun three years earlier – halted, reserves rose by $600bn (see chart); and reserves are now close to 50 per cent of gross domestic product. Finally, a massive effort has been aimed at curbing the inflationary effects of intervention.
Thus, China has controlled the appreciation of both nominal and real exchange rates. This surely is currency manipulation. It is also protectionist, being equivalent to a uniform tariff and export subsidy.
What is the extent of the tariff and subsidy? How much is the Chinese currency undervalued against the dollar?
No consensus exists, you hear answers of anywhere from 10% to 40%, but the estimates do tend to bunch up at around the 25% mark. Keep that in mind when you read today’s news stories predicting a slight upvaluation of the renminbi from the current 6.82 to perhaps 6.5 or 6.4, ie, by at most 7.5%.
Undervaluation of the Chinese currency will exacerbate any tendency in the U.S. to a “jobless recovery.” As the economy revives, consumers will begin to shop to replace worn-out goods, from underwear to cars. An undervalued Chinese currency means that these consumers will tend to prefer Chinese over U.S.-made goods, and that their spending will stimulate employment growth in China not at home.
The New York Times reported yesterday on early signs of the return of the consumer. Based on data from Mastercard, the NYT sees a 22.7% increase in spending on luxury goods in March 2010 as compared to March 2009, a 13.8% increase in spending furniture and home furnishings, and a 5.2% increase in spending on speciality apparel.
Furniture was an industry hit especially hard by the downturn. Orders dropped by 20%-40% after the housing slump, and industry insiders expect some well-known brands to disappear altogether. North Carolina, home state of the domestic furniture industry, suffers unemployment of over 11%. In furniture-dependent areas, unemployment verges on 16%.
When consumers start buying again, will the furniture factories recall their workers? That may depend on China’s central bank – and America’s reaction to China’s policy of accepting inflation at home in order to shift employment from the U.S.
sinz54 // Apr 8, 2010 at 10:50 am
You left out one little item.
America’s poor will benefit from cheap Chinese goods, because they can buy more such goods for their homes.
If Wal-Mart disappeared as the Left dreams of happening, all those poor people I see shopping there would suddenly have to start shopping in more expensive American boutiques.
That means their dollars would not go as far, and they would have to go without goods they would like to buy.
If China raised her exchange rate by 25%, that would amount to raising the prices of imported goods (bought by the working poor) by 25%. Wait till consumers start raising a howl. You’ll hear calls that Wal-Mart is “price gouging.”
I never get upset over governments “undervaluing” their currency. That policy, just like wage-and-price controls, has to collapse eventually.
LiberalHottie // Apr 8, 2010 at 11:20 am
I’m not sure that such a collapse is inevitable. In a state-controlled, export-driven economy of a certain size it should be possible to manipulate against a single currency essentially indefinitely, particularly in a totalitarian state where if you complain too loudly about anything, you get shot.
FormerConservative // Apr 8, 2010 at 1:39 pm
David,
I would love to hear your opinion on implementing a fair trade, vs. free trade policy that would allow us to tariff imports from countries that manipulate their currency. I understand that this directly conflicts with David Ricardo’s economic thesis of free trade. However, there are (at least) four key policy goals in play here: a) full employment, b) balanced budgets, c) national security and d) environmental standards.
Our economy is consumer driven. With high levels of unemployment we may not be able to return to growth because consumption is impaired. The increased tax revenue from higher emploment levels and tariffs will help balance the budgets. It’s in our security interests to not allowing our entire manufacturing base to be hollowed out. Finally, the global environment is better served if stuff is made with some modicum of environmental consideration. This is something the Chinese and other emerging economies care much less about.
If we adhere to a strict Ricardo approach to free trade then does that not trap us into a race to the bottom? Will we just have to wait through several “lost decades” while the American worker adjusts herself to the wage realities dictated by the billions of people in China and India?
Carney // Apr 8, 2010 at 1:54 pm
What are we complaining about? Surely China’s currency manipulation has a downside, an opportunity cost, that they will have to pay at some point or other, and pay more the longer they keep it up.
ottovbvs // Apr 8, 2010 at 5:30 pm
Carney // Apr 8, 2010 at 1:54 pm
What are we complaining about?
…….the fact that the third largest economy in the world has a currency that is 20-40% undervalued…..this in turn is destroying large tracts of not only our domestic manufacturing industry but also those of developed countries in Europe and developing nations struggling to emerge from poverty……the more intellectually challenged like yourself and Sinz (who apparently thinks it’s largely a problem of christmas decorations and brooms at Wal-Mart) need to realize that this is a huge international problem……the Chinese are not just making Christmas decorations as their emergence as a serious bidder on a high speed rail system in CA announced this morning demonstrates…..unless this issue is resolved we and the rest of the world are going to resort to protection as we should…..this is imho the major foreign policy issue on Obama’s desk…..far eclipsing the antics of Karzai or Netanyahu
ottovbvs // Apr 8, 2010 at 5:35 pm
sinz54 // Apr 8, 2010 at 10:50 am
” I never get upset over governments “undervaluing” their currency. That policy, just like wage-and-price controls, has to collapse eventually.”
…….Just when I think I’ve heard the most brain dead statement from Sinz…..he suprises me yet again…….a government like China’s can continue a policy of mercantilist autarchy indefinitely……this is not wage/price controls in the US or Europe for your info
Carney // Apr 9, 2010 at 1:39 pm
otto, if artificially devaluing your currency is the sure and easy shortcut to riches, with no downside ever, why doesn’t everyone do it? And where’s the stopping point? 35% undervalued? 99.999%? Why wasn’t Zimbabwe bestriding the world like a colossus when its currency became so worthless as to make a 100 trillion dollar banknote a real item?
http://upload.wikimedia.org/wikipedia/en/3/3e/Zimbabwe_$100_trillion_2009_Obverse.jpg