China

Just after 5:30 p.m. tomorrow, the Senate will invoke cloture on the China currency bill, S.1619.  Passage by late Wednesday is assured. The bill imposes tougher reporting requirements on the Treasury Department and allows countervailing duty suits to be brought for currency manipulation.  House passage is very unlikely despite majority support in both parties because Speaker John Boehner (R-OH) won't take it up, even though the House passed a similar bill last year.  What's going on here?

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.

    Why do the spin-meisters keep doing this?  

     Just when Treasury Secretary Tim Geithner is enjoying a rare patch of fairly positive press coverage, the Treasury resorts to one of the oldest and hoariest ruses in the PR handbook for announcing something in a way to attract a bare minimum of public attention.

     The WSJ just posted Geithner's announcement that Treasury is delaying its semi-annual report on currency manipulation, which must either accuse or acquit China of manipulating its currency, the renmimbi, to boost exports.

     To his credit, Geithner is openly admitting that he's delaying the report because he doesn't want to making the Chinese mad ahead of "high-level meetings" over the next three month. That's more than the Bush Treasury did; on at least one occasion, it missed the Congressional deadline for months without even bothering to say anything.

Tensions between the US and Chinese governments flared up this week regarding the negative effect of the undervalued yuan on US exports.  I don't think claims that the yuan is not undervalued hold much water -- China maintains a fixed exchange rate to the dollar, accumulates dollar-denominated assets, and runs a large trade surplus with the US.  How exactly does that suggest that the yuan is anything but undervalued relative to what it would be if it floated? What to do about is more subtle.

Paul Krugman is correct when he calls this a drastic form of mercantilism, and he has a point when he argues for a tough stance against the low value of the yuan:

Look, I know that many economists have a visceral dislike for this kind of confrontational policy. But you have to bear in mind that the really outlandish actor here is China: never before in history has a nation followed this drastic a mercantilist policy. And for those who counsel patience, arguing that China can eventually be brought around: the acute damage from China’s currency policy is happening now, while the world is still in a liquidity trap. Getting China to rethink that policy years from now, when (one can hope) advanced economies have returned to more or less full employment, is worth very little.

These mercantilist games have historically been played by sovereigns who think only of their own imperial glory -- how much gold they have in the palace -- rather than the welfare of their citizens.  The citizens are forced to work, to export, and to send the foreign exchange not to their own consumption but to their sovereign's coffers.  Obviously, China's leaders have something in mind besides improving the near-term consumption levels of Chinese citizens.  Their concern is continued employment growth.

Enjoy!