China Currency Gesture May Not Be Enough To Head Off Congress

At 5 p.m. today, Treasury released its  Report to Congress on International Economic and Exchange Rate Policies.  Regarding China, it said:  "On June 19, 2010, China announced that it was returning to an exchange rate regime that would be more flexible and more market based, with the renminbi allowed to trade within a band of plus/minus 0.5 percent against the dollar on a daily basis. On June 21, the first trading day following China’s announcement, the renminbi appreciated 0.43 percent, the largest single day appreciation against the dollar since China’s initial 2.1 percent revaluation on July 21, 2005. Between the June 19 announcement and July 2, the renminbi appreciated a total of 0.81 percent versus the dollar, while average intraday volatility has been much higher than that seen during the 2007-08 period of steady renminbi appreciation against the dollar.  China’s policy shift is a significant development and a welcome step forward in fostering stronger, more sustainable, and more balanced global growth. What matters is how far and how fast the renminbi appreciates. This strengthening would complement other policy reforms to rebalance Chinese economic growth toward consumption and sustain the reduction in China’s external imbalances"

Just before Congress recessed for July 4th, Senate Chuck Schumer (D-NY) made it very clear he plans to push his China currency bill, S.3134, when Congress returns next week.  He was not impressed by China's June 19 announcement nor by its subsequent revaluation.  Senate Majority Leader Harry Reid (D-NV) hasn't said whether he will make time for Schumer's bill.  I expect President Obama and Treasury Secretary Geithner to urge Reid and Schumer to refrain from offering the bill.  Senator Baucus (D-MT) has a much weaker bill. S.1607, from the 110th Congress, which could pass as a compromise.  Stay posted for the outcome.

This is a very complicated issue.  Congress wants to protect American manufacturing jobs despite the huge subsidy to American consumers from China's massive currency interventions to keep the renminbi pegged to the dollar.  China insists on maintaining export growth to keep its urban manufacturing workforce employed. Weakened exports during the recent downturn threaten China's political stability.  China's huge purchases of Treasury debt are essential to maintaining our recovery, as weak as it is, and the slightest whiff of protection could boomerang on the U.S.  However, China's massive 60% savings rate and huge trade surpluses with the U.S. forced us into a lot of debt accumulation and overspending that lay behind the financial crisis that we unleashed on the world.  From China's point of view, those surpluses were necessary to ward off currency crises that have afflicted so many developing nations   I just finished reading Martin Wolf's book, Fixing Global Finance, and I recommend it highly because it delves behind this issue so well and because it considers contrary opinions so thoroughly.