Tuesday, September 27, 2011

China is not a currency manipulator

Harry Reid thinks he's more likely to pass a bill labeling China a "currency manipulator" than he is to pass the jobs bill that Obama repeatedly urges Congress to pass "right now." He's probably right, but not because China is a currency manipulator.

The claim—popular among politicians and industries forced to compete with Chinese imports—that China is manipulating its currency by keeping it too weak is tough to square with the facts. As the top chart shows, the Chinese yuan has been steadily appreciating against the dollar since 1994, for a cumulative gain of 36%. The second chart shows the real, inflation-adjusted value of the yuan vis a vis a large basket of currencies, and here again we see the yuan has appreciated significantly: since early 1994 the yuan has appreciated by a whopping 58%.

Reid is not going to waste his time with Obama's jobs bill, because he knows it is no good and thus is going nowhere. He would do well to back off the China-bashing also, since it would be a very bad move. The only purpose of the "currency manipulator" finding would be to impose tariffs on Chinese imports, and those would presumably benefit only a small minority of industries and their workers, while punishing everyone else with higher prices and more inflation.

Yes, China has been "manipulating" its currency, but only in the direction of making it stronger, in part to avoid letting the yuan follow the dollar down against other currencies. This makes it more difficult for its industries to compete in the U.S., but it also raises China's standard of living—by making imports cheaper—and keeps inflation at bay. There's nothing wrong with that, and we could benefit from a stronger dollar as well.

UPDATE: I forgot to mention one other very important fact: by continually revaluing upwards the yuan vis a vis the dollar, the Chinese are unilaterally reducing the value to them of their considerable holdings of Treasury securities—some $1.2 trillion. In just the past year, raising the yuan/dollar exchange has cost the Chinese approximately $70 billion. And we want them to do this even more?

UPDATE: Dan Ikenson at Cato has a good article which goes into detail about why branding China a currency manipulator would be a big mistake.


James said...

If I am on the freeway and the speed limit is 75, but I increased my speed for the past 1 hour at a whopping 58%, does it mean I am travelling the speed limit?

You logic is fantastically flawed.

This "claim" is not only "popular" among politicians and industries, but also... economists. (I feel like your next post will be regarding the farce of climate change?)

"it raises China's standard of living" Wow, have you ever been in China?

"We could benefit from a stronger dollar" You disagree that more exports (and thus raise GDP) is good?

Major fail, friend.

Ed R said...

How can you say China is not manipulating its currency?? Why don't they let it float (become freely convertible - both ways - just like the US$) and the world can find out for itself whether it is being manipulated or not.

TradingStrategyLetter - Weekly Summary said...

'Climate change?' I thought it was global warming?

FYI most of China is state of the art - sleek and modern. We can only dream of similar mechanized factories and production.

Only 'losers' resort to currency price level valuations. The Chinese worry about the haord of potentially worthless US dollar and bonds they hold.

When you go deep into debt u become a rule taker not a rule maker.

Benjamin Cole said...

I still believe the yuan should float freely, and that would settle arguments about manipulation.

William said...

Thank you. I emailed your last paragraph to Senator Reid and my two state senators.

Rich said...

In 1994 the CNY was devalued 54% overnight vs. the USD by government fiat.

The US trade deficit problem with China emanated from this action.

The CNY is pegged to the USD. In July 2011, the Economist's Big Mac index has the Yuan 44% undervalued on PPP vs. the USD.

see - http://www.economist.com/blogs/dailychart/2011/07/big-mac-index

How can you possibly imagine that China hasn't manipulated its currency in pursuit of a mercantilist trading strategy?

McKibbinUSA said...

I tend to agree that the Chinese are really not the cause of America's economic troubles -- building good products and selling them for a profit is what the Chinese seem to do very well -- the US should seek to learn what she can from China's example -- unfortunately, the US is not adept at learning from the experiences of other nations...

Benjamin Cole said...

While China builds a nation, we build the seventh Fleet, occupy Iraqistan and create a welfare class at home---on borrowed money.

Gee, I wonder how this will turn out

Bill said...


While I agree with many of your posts, I do not think you are correct on China and currency manipulation. Just ask someone who makes a product that competes with China (I have) and they will tell you that China is not a fair competitor. These are not left wing liberals but honest business people who would simply like a level playing field.

Scott Grannis said...

Bill: If China wants to sell us products at ridiculously low prices that we can't match, and then turns around and invests a good portion of the proceeds in our Treasury securities, which subsequently suffer from a depreciating dollar, then we should never tell them no. It may not be "fair" to those who can't compete, but it is a bonanza for everyone else.

Frozen in the North said...


The devaluation of the Yuan is a matter of public record, using "the day after" as your starting point is disingenuous.

The advantage of China of lower labor costs (and virtually no environmental regulation) is not something that America can "replicate".

China'a accession to the WTO allowed American corporation to off-shore labor, closing U.S. plants and beginning production where labor was paid in a day what an American worker would earn in a day (if not a week). That was, in a very real way, the day Capital beat labor, and has been kicking its ass ever since.

for those who say that China is modern and efficient I say get out of Shanghai a bit... leave the city center and you will see the problems that China faces (really it's like visit NYC and saying -- so this is America!).

Finally, if China doesn't like the amount of dollars it holds it can simply stop selling stuff to America... because its the only way excess dollar will cease to flow to China (they can recycle into Euro -- but at the end it comes to the same point, it has to basic math).

Scott Grannis said...

The 1993 devaluation of the yuan occurred almost 18 years ago, and that is practically ancient history. The Chinese economy has had plenty of time to adjust to its exchange rate. It is perfectly legitimate for the Chinese central bank to use exchange rate targeting as its major policy tool. Impose an exchange rate on an economy and the economy will eventually adjust to it, just as an economy will adjust to an interest rate target. China's 15-yr record of very low inflation and very strong tells me that what they have done has been good. If the exchange rate had been pegged at a rate that was "too low" then China would have suffered from lots more inflation.

Regardless, it would certainly be in China's interests to liberalize capital flows, since by doing so it would likely not have to buy so many dollars. That the economy is not totally free is a problem for the Chinese, since they could otherwise be even more prosperous. But we have benefited enormously from our trade with China.

Bill said...


So, you seem to agree that China is a currency manipulator, but that it's not a problem because all the unemployed manufacturing workers can now use their unemployment benefits to buy cheap products at Walmart?

TradingStrategyLetter - Weekly Summary said...

You can thank the bloodsucking unions for that!

Frozen in the North said...


I never said that America didn't benefit as a whole from the Chinese accession to the WTO, and yes 18 years is a long, long time.

But then you're the one that used '94! maybe not intentional but still it does harm your argument.

Your second argument that liberalization of the their currency would lead to fewer dollar purchase, is only true as long as America trade deficit shrinks, otherwise directly or indirectly China will be dollar liabilities.

The two aspects (goods and capital) of trade have to balance (even if you add players to the game)

Daniel said...

Just wait until you see the 10% labor rate increases reflected for spring of 2012, and then again another 10% for Fall of 2012. There is HUGE margin compression and retailers will be forced to increase retail prices on just about everything. And this is just the beginning......

Swanson said...

Scott, Im a fan of your blog, but I respectively disagree. If China played by the rules of the game, they would let there currency float, which would lower their inflation and raise the standard of living of their people. But instead, after Ben Bernanke has expanded the Fed Balance Sheet to $2.9trillion, the Chinese still feel like the safest place to put their money is in US Treasuries? Why not say FU to the U.S. and not buy as much Treasuries? However, when your Govt. is owned by Exporters then it makes sense to cheat the system, right? But how long can this last for? Thanks to Bernanke, inflation in China is only going to get worse. So what happens when the cost of food in China rises more than your wages? We've seen that story in other parts of the world, and its not good. Whatever amount the Yuan is at is still to low. Either action needs to be taking by the Chinese or something must come from congress, either by a tariffs or a import certificate plan similar to what Warren Buffett suggested in 2003. America needs to restore some of the 5.6 million manufacturing jobs that it has lost since after the onset of the Asian Currency Crisis of 97. As Herb Stein said, "If something cannot go on forever, it will stop." America and China both benefited through this decade of low U.S. Inflation. But at what cost? I think that is now apparent. The rules need to change.