The Heat is on: Pressure is Rising on China
US lawmakers and the US government are raising pressure on China to let the yuan appreciate. The New York Times writes:
The Obama administration increased its criticism of China’s economic policies on Thursday, as Treasury Secretary Timothy F. Geithner told Congress that China had substantially undervalued its currency to gain an unfair trade advantage, tolerated theft of foreign technology and created unreasonable barriers to American imports.
But the election year anger from lawmakers seemed to surpass even Mr. Geithner’s tougher posture. Lawmakers expressed impatience with the administration’s familiar reliance on persuasion and negotiation, saying such tactics had yielded little.
In a testimony before the hearing on China’s Exchange Rate Policy of the US House of Representatives last week, Fred Bergsten argued that the sharply increasing trade imbalances between the US and China make it considerably harder for the US to reduce unemployment and achieve a sustainable recovery.
China’s currency remains substantially undervalued, importantly due to that country’s massive intervention in the foreign exchange markets, and is a major cause of its large and growing trade surplus. It has risen by less than 1 percent since the announcement of a “new policy” in June 2010.
China let its exchange rate rise by 20 to 25 percent during 2005–08. Our goal should be to persuade it to permit a similar increase over the next two to three years. This would reduce China’s global current account surplus by $350 billion to $500 billion and the US global current account deficit by $50 billion to $120 billion.
Elimination of the Chinese misalignment would create about half a million US jobs, mainly in manufacturing and with above-average wages, over the next couple of years. The budget cost of this effective stimulus effort would be zero.
The Chinese government responded predictably. Quote NYT:
In Beijing, a spokeswoman for the Foreign Ministry said that China would not respond to pressure and that a revaluation of the currency, the renminbi, would do little to affect the United States trade deficit with China. But the renminbi strengthened by 0.27 percent to end trading at 6.72 per dollar Thursday as the government appeared to belatedly permit the greater currency flexibility it had promised in June.
In my view, it will be of limited use trying to pressure China to reform its exchange rate regime. The key message that Chinese policy makers need to understand is that it is in their own interest to de-peg from the dollar in order to make progress in reforming their monetary policy. In a recent paper with James Reade on the Chinese monetary policy and the dollar peg (for a preliminary version click here) we argue that capital controls and the use of monetary instruments other than the interest rate have enabled China to exert relatively autonomous monetary policy. Nonetheless, we argue that the People’s Bank of China would be able to develop and pursue a more efficient monetary policy mix if it could make e ffective use of the interest rate tool, which at present is sidelined by the exchange rate peg. Reformers within the Chinese government have been arguing along this line, but thus far China’s leadership has been reluctant to reform. In China’s own interest, monetary and exchange reform should advance rather sooner than later.
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