Editor’s Note: Amelia Lo, the author of this article, is a Chinese law student in Hong Kong who was a foreign intern at Baker & Hostetler LLP during the summer, 2010.
According to United States Senator Charles Schumer (D-NY), a strident critic of China’s currency policy, “[the] most important issue in the Chinese-American relationship is currency.” Schumer and other American critics often have used the term “currency manipulation”, fraught with negative connotation, when referring to China’s currency policy. To appreciate the perspectives of two distinct sides in this debate, it is probably better to find more neutral language. Governments may control the value of their currency, whether through the money supply (the actions of the American Federal Reserve Bank) or by floating on world currency markets. Consequently, reference to “currency control” instead of “currency manipulation” might facilitate a dialogue that, to date, has been confrontational and full of accusations.
China pegs its currency to the U.S. dollar at about 6.827. In May, 2010, the trade deficit between China and the US was “the largest imbalance with any country”. In June, the US trade deficit had reached nearly $50 billion, the largest figure in two years.
During 2010, there have been a number of bilateral meetings between Premier Hu of China and President Obama of the United States. On June 19th, China’s central bank announced that it would reform “the formation mechanism of the Yuan exchange rate to improve its flexibility”. The United States interpreted this announcement as an important Chinese concession, and looked forward to a significant and rapid adjustment in the exchange rate between the yuan (or “renminbi”or “RMB”) and the dollar. There may have been exaggerated expectations of instant and significant market changes following China’s announcement, but only two small adjustments have occurred since June 19 and it may be too early to evaluate China’s new exchange rate policy.
The U.S. Point Of View
There seems to be an American consensus that China is manipulating the exchange rate of its currency, preventing it from floating free on world markets, to gain a trade advantage for an export-led economy. The mainstream American media project this view, consistent with frequent expressions of American politicians, that China is manipulating its currency by maintaining a very low value for the yuan in trading with the dollar and other currencies. Some, like Rep. Sander M. Levin (D-Mich.), even blame the unemployment problem in the U.S, perhaps the leading issue in the midterm elections, on China’s currency policy.
Although President Obama and Treasury Secretary Timothy F. Geithner have urged China “to allow the yuan to float higher,” they have been sensitive to potential Chinese reaction and value the U.S.-China relationship enough to avoid directly naming China as a currency manipulator in their annually mandated report to Congress. They postponed delivery of the report until China had indicated some movement on the currency, enabling them to soften the criticism they otherwise were encountering. They welcomed China’s June 19 announcement, but were concerned about how China’s promise to make its currency more flexible would affect U.S. China trade in practice. On 16 September, 2010, Secretary Geithner promised Congress that they, with other countries, will put pressure on China for “trade and currency reforms” in the next G20 summit in November in Seoul.
Although they have proposed different solutions to combat alleged currency manipulation, some more drastic than others, at least 130 US senators and representatives, Democrats and Republicans alike, disagree with China’s currency policy. Senator Charles E. Grassley (R-Iowa), the ranking member of the Senate Finance Committee, urged the Administration to name China as a currency manipulator. Going a step further, Congressman Levin (D-Mich.), Chairman of the House Ways and Means Committee, urged the Administration to monitor closely China’s progress and take appropriate action by filing a complaint against China at the WTO alleging violation of Article XV of the General Agreement on Tariffs and Trade.
While Levin and Grassley, key Democratic and Republican members in Congress, agree that the Administration should do more to influence China to take more significant steps to appreciate its currency, Senator Schumer and Reps. Tim Ryan (D-Ohio) and Tim Murphy (R-Pa.) have sponsored bills in the Senate and the House, such as the Currency Exchange Rate Oversight Reform Act 2010, intended to force the U.S. Commerce Department to obtain a trade remedy against China if its currency is undervalued.
Some American manufacturers argue that the Chinese yuan “is undervalued by as much as 40 percent” and that the undervaluation acts as an unfair subsidy to Chinese goods. Scott Paul, the executive director of the Alliance for American Manufacturing, has called on Congress to pass “strong legislation to penalize China’s currency manipulation”, believing that such congressional action would decrease the U.S. trade deficit. Another lobbying group, the Committee to Support U.S. Trade Laws, along with some 47 manufacturing groups and unions that make up the “Fair Currency Coalition”, support Senator Schumer’s legislative efforts to pass “an effective, WTO-consistent trade remedy without further delay.”
Despite the congressional pressures and pressure from American manufacturers, China is not without defenders in the United States. The US-China Business Council and the U.S. Chamber of Commerce agree that the exchange rate is a serious problem, but both contend that legislation treating currency control as a subsidy subject to countervailing duties is not a good way to achieve the goal of rebalancing the yuan. These associations think it wiser for the Administration to continue “its current approach of using multilateral and bilateral persuasion to achieve Chinese exchange rate reform” and to wait and observe the results. The Commerce Department’s recent ruling in late August, 2010 that China’s yuan value cannot be “considered a direct subsidy to Chinese exporters” is a wise move as it avoided the direct confrontation of trade and currency issues.
China’s Point Of View
The Chinese Government strongly denies allegations of currency manipulation and rejects claims that the yuan is undervalued. Premier Wen Jiaobao and the Chinese Foreign and Commerce Ministries are all of the view that China’s goal of a stable currency benefits the world at large, especially during the financial crisis.
Premier Wen maintains that China aims to continue to provide a stable currency and “steadily advance the reform of the formation mechanism of the RMB exchange rate under the principle of independent decision-making, controllability and gradual progress.” Wen emphasizes that, while “some countries [are applying double standards when they demand the appreciation of the yuan] but at the same time [practice] trade protectionism against China,” China will continue in its goal to work towards trade balance, rather than surplus.
To illustrate the advantage of a stable yuan-dollar exchange, Wen refers to the popular view that “China’s efforts to maintain a stable yuan-dollar exchange rate [despite pressure to devalue] during the 1998 Asian financial crisis helped the world.” China’s decision to keep its currency stable gave its currency credibility and ensured China’s financial stability after the crisis as “the nation [was able to] focus on improving productivity, quality and cutting costs.”
Foreign Ministry spokesman Qin Gang thinks that the U.S. politicizes the currency issue too much, and in a destructive and negative way. He argues that, contrary to what U.S. congressmen may expect, “the appreciation of the yuan will neither root out the U.S. trade deficit to China nor solve the low U.S. savings rate or unemployment” problems. Members of the Commerce Ministry, including Commerce Minister Chen Deming, Vice Commerce Minister Zhong Shan, and Commerce Ministry Spokesman Yao Jian, have reiterated consistently that the U.S. trade deficit will not be solved by a change in China’s currency policy. Yao ascribes reasons other than the currency policy, such as globalization, for China’s trade surplus.
According to Zhong, the U.S. China trade deficit “is caused by the shift in international division of labor and of industries against the backdrop of globalization.” This theory, he says, was demonstrated in March, when China’s trade surplus briefly fell into a trade deficit under a basically stable exchange rate. While Yi Gang, head of the State Administration of Foreign Exchange and Deputy Governor of the People’s Bank of China, contended that an official timetable for currency reform was not viable due to unbalanced development in China, he emphasized that China’s major goal in exchange rate reform is to make the yuan a “convertible currency”, one that can flow freely.
According to China’s Yuan Stress Test in March 2010, “half of China’s textile firms may [go] bankrupt if the value of the [Yuan] rises 5 percent against the U.S. dollar, given the industry’s thin profit margins.” Such job losses could affect as many as 20 million civilians directly engaged in the textile industry, and another 140 million working in cotton farming. Such indicators lead Chinese authorities to insist that the yuan’s convertibility is an internal affair, and that China will not sacrifice its domestic interests under foreign pressure.
Selected Points Of View Of Scholars
There is a variety of views on this subject: while some support China, many are those who strongly believe that the yuan is undervalued.
Supporters of China’s currency policy include Nobel Prize Laureate Robert A. Mundell, “father” of the Euro. He remarked in June 2010 that he did not think that China should have a large appreciation in the current situation and that too much appreciation would hurt China’s economy. Another Nobel Laureate, Joseph Stiglitz, contends that the “US’s [act of forcing] China to revalue the RMB is a manifestation of protectionism” and that “the United States putting pressure on China for Yuan appreciation is [not a good idea as it risks] shaking up the foundation of world economic recovery.”
Economist Bai Chong-en of Tsinghua University in Beijing thinks that the yuan is not seriously undervalued. He further contends that outside pressure on China to reform its exchange rate may do more harm than good in convincing China to allow its currency to appreciate, as “people don’t like to be forced to change things.” Xia Bin, economist and counselor of the State Council, asserts that the US deficit is caused by the “defective economic structure” of the US but not China’s yuan value. Huang Yiping, a professor at Peking University, who considers himself “a strong advocate of greater exchange rate flexibility in China”,disapproves of Nobel Laureate Paul Krugman’s advice to the US government to blame, finger point and confront China for global problems and job losses.
There are strongly-held, contrary views from other leading economists. Krugman, Fred Bergsten, Director of the Peterson Institute for International Economics, and Robert E. Scott , Senior Economist of the Economic Policy Institute, have repeatedly urged the U.S. government to adopt more aggressive policies such as ‘naming and shaming’ and retaliatory measures against China. All three scholars blame China for US job losses, though the values they allege vary from about 1.5 million to 3 million.
Krugman has accused China’s “undervalued” yuan of being a “significant drag on global economic recovery,” and has referred to China’s exchange rate policy as “most distortionary” and “[damaging]” and China’s manipulation to be “self-evident”. To Krugman, and to Scott, the United States has the upper hand over Chinese exports and the U.S. government should not be afraid to force China into action on the currency.
Bergsten thinks the yuan is undervalued by between “[at least] 25 and 40 percent”. He claims that China’s 2005 appreciation was not a real appreciation due to China’s increase in productivity. Although Bergsten acknowledges that macroeconomic forces contribute to China’s undervalued currency, he blames the Chinese government for manipulating its currency by “[buying] about $1 billion daily in the exchange markets to keep [its] currency from rising”, and claims these purchases to be the main cause of the exchange problem, in addition to a form of protectionism.
Would An Appreciation Of The Chinese Currency Actually Help The United States?
All things being equal, as economists like to say, an appreciation of the Chinese currency would make Chinese goods more expensive in the US and US goods cheaper in China. Logically, an appreciation of the yuan therefore would decrease the US trade deficit with China, increase exports, and thus create jobs in the US. China’s policy helps China in the long run. But does it help China in the short run, as it may inhibit Chinese manufacturers’ desire to improve the quality of their products, such that they may have a quality advantage in addition to a cost advantage in the future? Will other countries regard China as a market economy were it to adopt a fixed rather than floating rate?
The Peterson Institute for International Economics defines one of the criteria for “manipulation” to be “large intervention in one direction over a sustained period that frustrates balance of payments adjustments.” If that definition were adopted generally, many countries in the world, including the U.S., could arguably fit the description of currency control or manipulation at first glance. Liam Halligan, a UK-based economist and commentator, argues that “America’s long standing ‘weak dollar’ policy,” which “[allowed] its currency to depreciate in order to lower the value of its foreign debt,” “[amounted] to the biggest currency manipulation [and protectionism ] in human history.”
As Treasury Secretary Geithner wisely understands, the US cannot “force” China to revalue its currency in order “to create a level playing field for American exporters.” Relentless pressure on China to revalue could harm the U.S. China relationship, which the Administration seems to value more than the narrower issue of currency exchange. At the same time, the Chinese government should take into account the concerns of the US and conduct more dialogue with the US while it improves the flexibility of its currency.
According to Brookings Institution Senior Fellow Barry Bosworth, focusing exclusively on the exchange rate issue is “a mistake”. The US government should focus on expanding US exports. Rather than blaming China for its economic problems, the US government should work within its own scope of influence, to formulate strategies that enhance the production capacity of manufacturers, to implement tax saving incentives to encourage employment and help small businesses.
We should not forget that US consumers have benefited from the diversity of low-cost Chinese imports. If the US were to impose trade restrictions on China’s goods, US consumers would likely have fewer choices.
Time is required for an economy like China’s to transform from being export-oriented to market-based. Both China and the U.S. are concerned about unemployment. On June 20th of this year, the Chinese government made a promise. The U.S. should be patient and wait to see the results of China’s promise. According to recent measurements, the value of the yuan “has risen about 1.5 percent, most of that over the course of [the week before the 15th of September]”, which is quite a promising figure. Instead of striving for actions that involve blaming, shaming and retaliating, the U.S. government can initiate acts of cooperation, trust and tolerance such as by increasing dialogue at the top, the middle and grass root levels with China so that it can understand China’s plan and policy better, and allow China to understand American concerns. By working together sincerely and communicating honestly and openly, the leaders of the two governments are likely to be able to reach a successful compromise and consensus on the currency issue.