Confusion at NYT About China's Currency Management

February 22, 2019

An article on United States trade policy with China dismissed the idea that the United States should push China to raise the value of its currency. It told readers:

“Mr. Trump’s advisers have also pressed China to refrain from further devaluing its currency to lift its economy as American tariffs bite. A drop in the value of the Chinese currency in the past year has already neutralized much of the economic effect of the 10 percent tariffs that Mr. Trump placed on roughly $200 billion of Chinese exports to the United States, said Eswar Prasad, a professor of international trade at Cornell University.

“Yet requiring China to manage its currency and keep it above a certain level would be a striking shift from the policy of past administrations, which have tried to encourage China to let the value of its currency rise and fall with market forces.

“‘It’s a very odd way to approach this,’ Mr. Prasad said, ‘to tell China, after having told them for all these years, ‘Let your currency be determined by market forces,’ to say, ‘Let your currency be determined by market forces only if it is appreciating.””

This section implies that China is doing nothing now to hold down the value of its currency. However, China holds a huge amount of international reserves, with the sum coming to more than $4 trillion, counting its sovereign wealth fund. Earlier this month, the New York Times ran a piece noting Russia’s extraordinary level of reserves, noting it had more than three times the reserves recommended by the IMF, relative to the size of its economy.

China’s reserves are even larger relative to the size of its economy than Russia’s, so unless the NYT has gone full Trump, China must have more than three times the reserve recommended by the IMF for a country its size.

This matters, because China’s holdings of excess foreign reserves keeps down the value of its currency relative to the dollar and other currencies. This is similar to the story of the Federal Reserve Board’s holding of assets. While the Fed long ago ended its quantitative easing program, which involved buying assets, it continues to hold more than $3 trillion in assets, which most economists agree is a factor keeping down long-term interest rates. In the same vein, even though China is no longer buying up large amounts of dollars and other foreign exchange, its holdings of foreign currencies continue to keep down the value of the Chinese yuan.

All of this should be pretty straightforward, but for some reason, the NYT seems determined to obscure issues here.


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