The Treasury Department once again declined to label China a currency manipulator, despite arguing that the yuan “remains significantly undervalued” and should rise further. They basically patted themselves on the back and tried to show that their policy of engagement with China has worked to this point.
China “has substantially reduced the level of official intervention in exchange markets since the third quarter of 2011,” the Treasury said in a statement accompanying its semi- annual currency report to Congress yesterday. The yuan has gained 9.3 percent in nominal terms and 12.6 percent in real terms against the dollar since June 2010, the Treasury said.
“It appears that the strategy of the last two administrations to use diplomacy rather than confrontation in dealing with the yuan’s value is having some positive results,” William Reinsch, president of the National Foreign Trade Council, a Washington-based business group, said in an e-mail after the report. “There is clearly room for further appreciation, however.”
Chuck Schumer, the lead sponsor of the anti-currency manipulation bill in the Senate, said in a statement, “This report all but admits China’s currency is being manipulated, but stops short of saying so explicitly. The formal designation matters because there can be no penalties without it. It’s time for the Obama administration to rip off the band-aid, and force China to play by the same rules as all other countries.” The bill, probably as much as the Treasury Department’s engagement, has led to Chinese re-valuation, though you would rarely hear anyone in Treasury admit that.
Moreover, the bill takes an agnostic approach to currency manipulation. We know that, even if China has stopped manipulating its currency for now, other countries have more than taken up the slack. And that has led to a loss of 4% of US GDP, which means millions of jobs. Indeed, this isn’t just about China; the Treasury Department hasn’t designated ANYONE a currency manipulator since 1994. The designation carries minor penalties, which would be strengthened by the Schumer bill.
Meanwhile, China “stopping” currency manipulation doesn’t mean that the yuan is properly valued, as virtually everyone with expertise in the field acknowledges. And there are economic consequences to that, as seen in the annual trade deficit. But US corporations who have factories in China would rather not see any pressure on Chinese currency, as they benefit from the low appreciation. That’s the real factor here.