Saturday, 2 July 2016

Trump Accuses China of Currency Manipulation: Fact or Fiction?

    The presumptive candidate for the Republican nomination for the US presidential election due later this year, Donald Trump, had this to say about the alleged currency manipulation by China: "The wanton manipulation of China's currency is robbing Americans of billions of dollars and millions of jobs". Even though this is clearly campaign rhetoric, yet the charge, if true, is a serious one and needs to be looked at very carefully. Therefore what are the facts and what is the fiction?
* The exchange value of the renminbi [yuan] is fixed each morning by the People's Bank of China [PBoC] within a narrow band of 2%, up or down, and within which market forces can have their say. This exchange rate is fixed primarily against the US dollar, but also against a basket of 13 currencies. Clearly therefore the PBoC controls the exchange rate.
* China is not the only country that does so. Well over half of the 189 member countries of the IMF fix their own respective exchange rate. About 26% of IMF members have currency boards and about 4% fix the rates by fiat. Some, including India, allow a floating rate with governments buying and selling as required. In the case of India the RBI intervenes where ever necessary. Only a few allow a free float with minimal state intervention.
* The truth is that since 2005 the Chinese yuan has massively appreciated against the US dollar. In 2005 the yuan was 8.27 to the dollar and in 2015 it was 6.1 to the US dollar. This happened partly due to massive western, but mainly US, pressure on China.
* This 36% appreciation means that some Chinese exports have become un- competitive; leading to displacement of the local economy, including transfer of some low value industries to Bangladesh and Vietnam. The Chinese economy has suffered due to the fact that wages and prices have as a result appreciated.
*On the other hand, look at the case of Japan. The Japanese currency, the yen, is allowed a free float; but in 2012 it was allowed to depreciate by a third against the US dollar as a part of Abenomics. No one in the US Congress, or for that matter any US politician, derided the move since Japan is a friendly country.
* Often the theory is propounded that if a currency is depreciated, it would lead to a surge in exports. Maybe true, but maybe not. From 2004-14 the US dollar depreciated against the Chinese yuan by about 25% and yet the US trade deficit with China blossomed from US$ 161.9 billion to US$ 342.6 billion!
* Therefore Trump's accusations are at best campaign rhetoric or at worst disingenuous, for as the Wall Street Journal put it " If Zhou Xiaochuan [PBoC Governor] is a currency manipulator, then Janet Yellin [US Fed Chief] is an interest rate manipulator". The truth, as always, lies somewhere in between!        

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