Apr 01 2015
A decade of China-US currency friction?
By Den Steinbock
As the U.S. dollar is appreciating and beginning to reduce net exports, Democrats and Republicans are again talking about legislation to counter what they perceive as unfair currency undervaluation. The argument is that such “manipulation of exchange rates” allows some countries keep to their currencies artificially weak and thus unfairly make their exports more competitive.
These bipartisan efforts are promoted by the car industry and its supporters in labor unions and steel industry.
Washington sees currency manipulation as pervasive in China and several other large emerging economies. Conversely, many of the latter see the U.S. and other major advanced economies as the prime “currency manipulators.”
Since the aftermath of the global financial crisis, economies have deployed a mix of policy tools for competitive devaluation, including direct government intervention and capital controls, and indirectly quantitative easing.
The economic consequences of monetary divergence
As the U.S. is recovering but Europe and Japan are not, growth is decelerating in China, and the Federal Reserve is expected to hike the policy rate by the third quarter.
In the coming years, it is monetary divergence – the Fed’s impending hikes versus low rates and quantitative easing (QE) in Europe and Japan, and monetary easing in the East – that will make and break the wealth of nations.
In the new normal, the quest to label China and other emerging economies “currency manipulators” is not only misguided, but poorly timed.
After the global crisis, capital inflows boosted China’s large balance-of-payment surplus while the People’s Bank of China (PBOC) bought dollar-denominated assets seeking to contain upward pressures on the renminbi. This period peaked last July, when China’s foreign exchange reserves amounted to $4 trillion.
As U.S. monetary policy is reversing, so is the direction of China’s capital flows. With net capital outflows, China’s balance-of-payment surplus actually turned negative in late 2014. The PBOC did intervene but it did so to slow the renminbi’s depreciation. By January, the foreign exchange reserves had declined to $3.9 trillion.
The bottom line is simple. Even if there was a commonly accepted definition of “currency manipulation” and China would qualify as a “currency manipulator,” the free float of the renminbi would result in depreciation – not appreciation – under current market conditions.
The political motivations behind currency friction
For years, the Congress has expressed concerns with the potential impact of “currency manipulation” on international trade and the perceived failure of the international multilateral organizations to contain competitive devaluations.
The International Monetary Fund (IMF) has jurisdiction for exchange rate matters, but it cannot force a country to change its exchange rate policies. The World Trade Organization (WTO) is responsible for the rules governing international trade, but these do not seem to encompass currency manipulation. So the Congress is considering legislation to amend U.S. countervailing duty law.
In the emerging world, such unilateralism is readily seen as an attempt to sustain the hegemony of advanced nations in the world economy, which is changing, and the dominance of international multilateral organizations, which should be reformed faster.
At the local level, the bipartisan quest against currency manipulation is promoted by U.S. auto producers which have indicated opposition to the Trans-Pacific Partnership (TPP) unless the issue is effectively resolved. The quest is not philanthropic.
In the postwar era, when the U.S. still dominated the world economy, the auto industry, headquartered in the rapidly-growing Detroit, enjoyed huge profits. But by 2008, the industry would have collapsed without government support. Two years later, China supplanted the U.S. as the world’s largest auto market.
Today, America’s economic dominance has been halved, while world trade is dominated by exports from China and emerging economies. In 2013 Detroit suffered the largest municipal bankruptcy in U.S. history. Meanwhile, U.S. auto exports are hitting records, thanks to strong demand in Asia and the Middle East.
In the new normal, the car industry would prefer a weak U.S. dollar to further boost exports – hence the effort at renminbi appreciation, or the failure of the TPP, or both.
These bipartisan efforts are promoted by the car industry and its supporters in labor unions and steel industry.
Washington sees currency manipulation as pervasive in China and several other large emerging economies. Conversely, many of the latter see the U.S. and other major advanced economies as the prime “currency manipulators.”
Since the aftermath of the global financial crisis, economies have deployed a mix of policy tools for competitive devaluation, including direct government intervention and capital controls, and indirectly quantitative easing.
The economic consequences of monetary divergence
As the U.S. is recovering but Europe and Japan are not, growth is decelerating in China, and the Federal Reserve is expected to hike the policy rate by the third quarter.
In the coming years, it is monetary divergence – the Fed’s impending hikes versus low rates and quantitative easing (QE) in Europe and Japan, and monetary easing in the East – that will make and break the wealth of nations.
In the new normal, the quest to label China and other emerging economies “currency manipulators” is not only misguided, but poorly timed.
After the global crisis, capital inflows boosted China’s large balance-of-payment surplus while the People’s Bank of China (PBOC) bought dollar-denominated assets seeking to contain upward pressures on the renminbi. This period peaked last July, when China’s foreign exchange reserves amounted to $4 trillion.
As U.S. monetary policy is reversing, so is the direction of China’s capital flows. With net capital outflows, China’s balance-of-payment surplus actually turned negative in late 2014. The PBOC did intervene but it did so to slow the renminbi’s depreciation. By January, the foreign exchange reserves had declined to $3.9 trillion.
The bottom line is simple. Even if there was a commonly accepted definition of “currency manipulation” and China would qualify as a “currency manipulator,” the free float of the renminbi would result in depreciation – not appreciation – under current market conditions.
The political motivations behind currency friction
For years, the Congress has expressed concerns with the potential impact of “currency manipulation” on international trade and the perceived failure of the international multilateral organizations to contain competitive devaluations.
The International Monetary Fund (IMF) has jurisdiction for exchange rate matters, but it cannot force a country to change its exchange rate policies. The World Trade Organization (WTO) is responsible for the rules governing international trade, but these do not seem to encompass currency manipulation. So the Congress is considering legislation to amend U.S. countervailing duty law.
In the emerging world, such unilateralism is readily seen as an attempt to sustain the hegemony of advanced nations in the world economy, which is changing, and the dominance of international multilateral organizations, which should be reformed faster.
At the local level, the bipartisan quest against currency manipulation is promoted by U.S. auto producers which have indicated opposition to the Trans-Pacific Partnership (TPP) unless the issue is effectively resolved. The quest is not philanthropic.
In the postwar era, when the U.S. still dominated the world economy, the auto industry, headquartered in the rapidly-growing Detroit, enjoyed huge profits. But by 2008, the industry would have collapsed without government support. Two years later, China supplanted the U.S. as the world’s largest auto market.
Today, America’s economic dominance has been halved, while world trade is dominated by exports from China and emerging economies. In 2013 Detroit suffered the largest municipal bankruptcy in U.S. history. Meanwhile, U.S. auto exports are hitting records, thanks to strong demand in Asia and the Middle East.
In the new normal, the car industry would prefer a weak U.S. dollar to further boost exports – hence the effort at renminbi appreciation, or the failure of the TPP, or both.
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