Washington has finally found an issue that can unite both left and right: big, bad, currency-manipulating China.
Unfortunately, both left and right fundamentally misunderstand what’s happening in China right now.
According to Donald Trump, China is “suck[ing] the blood out of the United States.” Sens. Chuck Schumer (D-N.Y.), Lindsey Graham (R-S.C.) and other bipartisan lawmakers have put things less colorfully, but endorsed the same message: China is rigging its currency to make its exports artificially cheap in order to hurt beleaguered U.S. workers.
The People’s Bank of China’s recent announcement of a change in how exchange rates are set — which has allowed the Chinese renminbi, also known as the yuan, to fall about 3 percent against the dollar between Monday and Thursday — has only fed the anti-China fervor.
More currency warfare!
But this latest outburst of blood thirst is confused. In fact, it’s completely backward. Despite what Trump et al. may tell you, China has just done pretty much what we’ve been asking it to do for decades.
China has long maintained what economists call an interventionist currency policy. Rather than letting markets determine exchange rates, the government stockpiled U.S. dollars to make the renminbi — and yes, Chinese exports — cheaper. But after much international criticism about “currency warfare,” over the past decade the Chinese government has gradually let the renminbi appreciate. On net, it’s risen more than 25 percent against the dollar.
This prompted the International Monetary Fund to officially determine in May that the renminbi was no longer undervalued.
Even so, the IMF also said that if China wants to run with the big boys and see the renminbi recognized as an international reserve currency — which China desperately wants for political reasons — it must allow more economic liberalization. That includes letting exchange rates be set by market forces, rather than by a government-determined, slowly-upwardlyadjusting soft peg.
So this week, China finally abided by the international community’s declared wishes: It said it would allow market forces to play a bigger role in setting exchange rates by letting each day’s market closing price help determine the following day’s opening price. It’s not a full, market-determined “float,” since the government can still intervene if it gets nervous about big swings. But it’s a step toward a market-set rate.
So what happened when markets had more say — that is, when the Chinese government loosened its oft-criticized “manipulation” of its currency, per U.S. wishes?
The value of the renminbi fell sharply against the dollar.
This does make Chinese exports cheaper, which to an extent is what the government wants given China’s economic slowdown. But it’s also what the market wants — much more so than the Chinese government.
Despite conspiracy theories from Trump et al. suggesting that China is intervening to unfairly weaken the renminbi, the freaked-out Chinese government is now desperately trying to prevent its currency from weakening as quickly as the markets want it to, since officials are now worried about capital flight. That is, Chinese leaders have effectively set a floor on how far the renminbi can fall.
This probably sounds confusing. American politicians complain that China is manipulating its currency to keep the renminbi artificially cheap. Yet markets seem to think China is manipulating its currency to instead make it artificially expensive. And the markets are probably right.
Every other major U.S. trading partner has seen its currency fall against the dollar over the past five years; only China’s currency has appreciated on net. That’s because the renminbi has been partially pegged to the dollar, and the dollar has been rising. (The United States is one of the few major economies that’s strengthening, so everyone and their mother is buying dollars.) It probably makes sense that the renminbi’s value should fall, given this context.
For all the hysterics about China’s devaluation, it’s also worth remembering that thus far the devaluation has been pretty minor. A single-digit-percent adjustment probably won’t affect the United States much either way. A weakening renminbi might, however, hurt other emerging market economies that compete with Chinese exports. If these other countries launch a currency devaluation arms race as a result, that could indeed be damaging for international financial markets.
There are a lot of Chinese policies that are unambiguously bad for American companies and workers, including disrespect for intellectual property rights, tolerance of cyberwarfare and unfair treatment of U.S. companies operating in China via arbitrary fines and “antitrust” rulings. But China’s recent move toward a more market-based exchange rate — which, again, we’ve been explicitly pressuring them to adopt — probably isn’t one of them.