The Big Question: Should the United States name China a currency manipulator?

By Clifford Coonan
Sunday 23 October 2011 07:53

Why are we asking this now?

The reason why the US Treasury is even thinking about this dreaded term is because China has effectively kept its currency, the renminbi or yuan, pegged against the US dollar since July 2008, despite having allowed it to appreciate by about 21 per cent against the dollar over the previous three years.

Every six months, the American Treasury is required by law to report on any countries that have been "manipulating the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair advantage in international trade".

What's the big deal about the label 'currency manipulator'?

This is not a label issued lightly, as ultimately it could start a trade war between China and the US, the world's two largest trading nations. Any row would inevitably drag in the EU and other countries. China has large current account surpluses, which should cause its currency to appreciate in value, the People's Bank of China has been buying US dollars and economists, particularly Western analysts, say that this keeps the value of the Chinese yuan currency artificially low. This means Chinese exports enjoy a competitive advantage when they go head-to-head against US products, and means foreign investment is likely to flow into China.

How popular is the bid to name China as a currency manipulator?

Branding China a "currency manipulator" has support among both Democrats and Republicans on both sides of the US Congress, where deputies are keen to show they are tough on China as the factories of their constituencies close for failure to compete with Chinese goods. Were China to be branded thus, this would allow for imposing extra tariffs on Chinese exports to the US. Among the chief proponents of the law has been Nobel Prize-winning economist Paul Krugman.

However, the report is proving divisive and Treasury Secretary Tim Geithner said last weekend that he would delay the report to Congress, which was originally scheduled on April 15. Before it gets issued there are a lot of things on the bilateral agenda – President Hu Jintao's visit to Washington to discuss sanctions against Iran, as well as other meetings in the next three months, at which exchange-rate policies will feature highly. China is a permanent member of the United Nations Security Council and the US needs its support to impose new sanctions against Tehran over its nuclear programme. Mr Geithner said the forthcoming round of meetings were the best way of advancing US interests at the moment.

Surely it is time to name and shame?

It's not that easy. This is essentially a political row. US-China relations have been under a lot of pressure in recent months, ever since a tense and not particularly friendly visit by President Barack Obama to Beijing late last year, when relations between the world's acknowledged superpower and the emerging power looked frosty. Since then they have only got worse, strained by issues such as negotiating sanctions on Iran, Washington's decision to sell arms to self-ruled Taiwan, which China considers a renegade province, and of course President Obama's meeting with the Tibetan spiritual leader Dalai Lama, who is loathed by Beijing.

However, in just the last few weeks, there have been signs of an easing of tensions. There have been various friendly comments from both sides, and, crucially, President Hu announced that he would attend a nuclear security summit hosted by President Obama in Washington on April 12-13. Mr Geithner said yesterday he thought the US economy was "looking substantially stronger" which also puts the US into a better bargaining position than last year, when it was forced to put up with Chinese criticisms about the US' poor record on credit issuance and its disastrously low saving ratio.

Washington needs to be careful not to antagonise Beijing too much. In previous trade rows, China did not have to worry too much about the domestic audience at home picking up on what was happening internationally and rising up, as the government kept the population in an iron grip. But three decades of economic reform have meant that people are better informed than ever about how China appears in the world.

They do not want to see any moves by the international community that might damage their interests, and will hold the Communist Party responsible for any mistakes in this area. So the Communist Party is forced to juggle its need for foreign currency, overseas iron ore and international respect with the demands of an increasingly sophisticated, and better informed, domestic audience.

What is the Chinese line on all of this?

China points out that its trade surplus has dropped by almost half over the past year and, since very early in the financial crisis, Beijing has blamed the trade deficit with the US on poor savings levels in the US and excessive spending. For a long time, China's reaction to Western calls to allow the yuan to appreciate in value were met by tit-for-tat accusations by Beijing that Western countries engaged in protectionism.

Beijing argues that China's intercession in the global economy by pumping four trillion yuan, around four hundred billion pounds, helped to bail out the world economy. Premier Wen Jiabao has long insisted that maintaining the basic stability of the renminbi exchange rate, especially against the background of the economic crisis, was "critical" and had helped China's development, thus aiding world economic recovery.

What has changed to delay the report's publication?

Basically, Sino-US relations seem to be on the upswing. The tone of the debate has changed markedly, with China now arguing that it has never manipulated its exchange rate for international trade benefits.

US Treasury Secretary Timothy Geithner said he was confident that China would see that it is in its own interest to make the yuan more flexible, while Beijing stoutly defended its currency policy. Mr Geithner said it was "China's choice" whether or not it revalues the yuan.

And China's Foreign Ministry spokeswoman Jiang Yu said the yuan's exchange rate was not the major cause of the US trade deficit with China and that allowing the yuan to appreciate would not solve the Sino-US trade imbalance. "We hope the US side can view the problem from an objective and reasonable perspective," she said, quoted on the Xinhua news agency, adding that China had always stood for resolving bilateral trade frictions through candid dialogue and pragmatic coordination.

And Chinese-based analysts say the US decision to delay its report on exchange rate policies could bring a turnaround in the recent currency dispute with China. The language has changed significantly. Zhang Yasheng, director-general of the Institute for International Economic Research with the National Development and Reform Commission, China's economic planning agency, told a news briefing that only when "each side takes half a step back" could a resolution be reached. This is a long way away from the combative tone of late last year.

Is it time the US hardened its stance against China's currency policy?


* Clearly China has dipped into its $2.5 trn in foreign exchange reserves to manipulate its currency value

* Chinese firms enjoy an unfair competitive advantage over US rivals when selling goods into some markets

* Encouraging China to continue to reform its exchange rate system will help rebalance the global economy


* China does not want to appear to be taking orders from Washington, if it can help it

* It would take more than just a rise in the value of the yuan to help cut the US trade deficit

* Japan's bowing to US pressure over the yen in the 1980s may have sparked its own economic decline

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