Stanley's blog

Writing in BusinessWeek on 12 March, Nobel Prize-winning economist Paul Krugman said global economic growth would be about 1.5% higher if China stopped restraining the value of its currency and running trade surpluses. “We should not be afraid of what the Chinese might do if we pressure them to stop this currency manipulation,” Krugman said.

Krugman said the US may need to get more aggressive in its negotiations with China, perhaps by treating the exchange-rate issue as a countervailing duty or other export subsidy. “Without a credible threat, were not going to get anywhere,” he said. “The chance that we would trigger a trade war is very small and it’s hard to see any alternative.”

The U.S. Treasury Department is due to issue its semi-annual report on foreign exchange markets next month. It could well formally label China as a “currency manipulator” on account of the yuan’s substantial undervalue. This would allow the Department of Commerce to impose countervailing duties on a wide range of Chinese products (see post of 13 March 2010).

Beijing’s current attitude is revealed by Premier Wen Jiabao’s statement at his press conference on 13 March that ”First of all, I don’t think the renminbi is undervalued.” He rejected foreign pressure over its exchange rate controls and said that the Chinese currency will be kept ”basically stable.” The reform of currency controls was promised but no indication given as to when that might happen. ”We will continue to reform the renminbi exchange rate regime and will keep the renminbi basically stable at an appropriate and balanced level,” Wen said.

The yuan was tied to the dollar for decades, but the link was broken in 2005 and allowed to rise by about 20% through late 2008. Beijing then re-imposed the link after the currency crisis occurred.
Both sides are upping the rhetoric and this will make it even more difficult to find a compromise. It is difficult to understand why Wen Jiabao should find it necessary to speak in such tough terms. Is it a message for domestic consumption or aimed at the US? For the latter, it may have been better to continue to make references to keeping the currency under view, rather than insisting that the yuan is not undervalued.

I hesitate to disagree with an economic icon, but:
• There are many economists who do not agree with Paul Krugman on the importance of the currency issue.
• Aggressive public pressure on Beijing does not work and can be counter-productive. Arguments why a controlled increase in value of the yuan is in China’s interests are likely to be more persuasive.
• If Washington takes action, Chinese retaliation is inevitable. The chances of a trade war are very real.

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Comments

  1. Hi Stanley,

    What’s your opinion? Do you think Chinese is the real world currency manipulator?

    I do think Chinese is the currency manipulator? The real currency manipulator is the voracious banker in Wall Street and US government. Mr Paul Krugman is just like a spokesperson for them.

    Lee

  2. Lee: This would be “for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” according to US law. But it’s essentially a political decision. I’m no expert on US law

  3. This would be “for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”

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    Whiteblack

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