China is not a currency manipulator, but along with Malaysia, Germany, and several other studs of the modern world economy, it might be. So says the latest periodic Treasury report, in which the U.S. refrained once again from saying China is a currency manipulator—after all that bluster from back when that this was sure to happen.
Clik here to view.
The US can set a floor in the RMB’s dollar price, and vice versa. photocredit: Getty
What’s a currency manipulator? Etymologically, it’s hard to see. “Manipulate” means to reconfigure with one’s hands. As in mano a mano, or even manacle. As for “invisible hand,” apparently Adam Smith got that metaphor from an associate who had spoken of the “invisible hand of Jupiter.” Try to manacle that.
The Treasury criteria are three. A nation is a currency manipulator if it, at high levels, runs a trade and current account surplus bilaterally (with the U.S.) and buys foreign currency. Here’s Treasury on China:
“The outsized magnitude of the bilateral [trade goods] deficit is a result of China’s persistent and widespread use of non-tariff barriers, non-market mechanisms, state subsidies, and other discriminatory measures that are increasingly distorting China’s trading and investment relationships.”
Treasury missed the biggest thing. China’s money has Mao’s picture on it. Nobody globally (including in Hong Kong) wants to have their wealth denominated in that sort of money.
Therefore, China has to collateralize its currency in the kind of money people want, things like the dollar, gold, etc. This makes the Mao’s-picture currency convertible, de facto, in globally good currency. As the Chinese economy has grown, so therefore has China’s demand for non-Mao-like monetary instruments, to keep the collateralization credible.
The way The People’s Republic acquires this global good money is, necessarily, to trade non-money (i.e., goods and services) for it. Hence the trade surplus.
That the Treasury declined to make this point—the central fact of the U.S.-China trading relationship for decades now—defies understanding. It is a mark of a lack of seriousness.
As for currency manipulation, the charge we have long heard is that the Chinese keep their currency undervalued against the dollar. This enables (per the theory) the trade surplus with the U.S.
