Monday, June 11, 2018

Geithner Wimps Out on PRC Currency Manipulation

The US Treasury is mandated by Congress to make biannual reports on the currency practices of America's trading partners. Just yesterday, the Treasury released its first report under the leadership of Secretary Geithner. As you are well aware, Geithner caused a ruckus in US-China trade relations by reiterating his boss Barack Obama's opinion that China was a currency manipulator [1, 2]. As I have pointed out again and again, he was not expressing his own opinion but that of Obama. Why is this difference important? Well, let's look at the statement of Geithner accompanying the latest report as to why China hasn't been branded a currency manipulator yet again:

With respect to China, which has been highlighted in the Report in recent years, our conclusion is based on the following factors. First, China has taken steps to enhance exchange rate flexibility. Chinese officials reaffirmed in January 2009 their commitment to greater flexibility and the need to allow the exchange rate to adapt to an equilibrium level. Second, the Chinese currency appreciated by 16.6 percent in real effective terms between the end of June 2008 and the end of February 2009. As the crisis intensified, the currency appreciated slightly against the dollar when most other emerging market and other currencies fell sharply against the dollar. Third, official statistics suggest the pace of China's foreign exchange reserve accumulation slowed in the fourth quarter of last year. Fourth, China has enacted a large fiscal stimulus package – second in size to that of the United States in the G-20 – which should help spur domestic demand growth and rebalance the Chinese economy. Even so, Treasury remains of the view that the renminbi is undervalued.

Given China's large and rapid increase in its current account surplus, these steps should be just a beginning to a series of policy steps to rebalance the Chinese economy so that economic growth is more dependent on domestic demand, particularly private consumption.
I have taken pains to explain why the US engaging in a trade war with China is actually desirable as the former would set into motion a process by which the US is disciplined via losing China as effective lender of last resort [1, 2]. Again, I consider the US hitting China with punitive legislation on an undervalued currency quite frankly ridiculous in that there is virtually no chance of it coming out ahead. Nevertheless, I am chuffed to note that many others--including Obama supporters who feel abandoned--are readying legislation to "punish" China. From Bloomberg:
The conclusion clashes with Geithner’s January 22 statement to a Senate panel that President Barack Obama “believes that China is manipulating its currency.” [I wish they'd stop repeating this fallacy as they aren't one in the same person.] The shift may anger U.S. lawmakers, companies and trade unions who have sought measures to punish nations perceived to have undervalued exchange rates.

“Clearly the Treasury has made more of a political decision than an economic decision here,” Republican Senator Lindsey Graham of South Carolina said in a Bloomberg Television interview. “The truth is the Chinese manipulate their currency.” Graham was a co-sponsor of a 2007 measure that would have allowed U.S. companies to ask for steeper tariffs against goods coming from countries found to have misaligned currencies.

Democratic Senator Charles Schumer of New York, another sponsor of that bill, said he would reintroduce it. “We are relying on the administration, as market conditions clear up, to keep China’s feet to the fire on this issue,” Schumer said in a statement. “To continue the effort on this front, we intend to reintroduce our legislation.”

The U.S. Business and Industry Council, which represents domestic manufacturing companies, said the decision not to label China as a currency manipulator “breaks a major commitment candidate Obama made last year to fight Chinese exchange-rate protectionism.”
Obama's "China Currency Coalition" colleagues are now expressing understandable displeasure over his finance minister coddling these trade evildoers, having hoped for much more. Although I am generally appalled by their agenda, I think they have legitimate grievances over representation of interests. They're baying for a US-China showdown at the Trade OK Corral; well so am I. They think they can come out ahead while I certainly don't think so. I guess there's only one way to find out.

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