April 14, 2011
The NYT discussed the agenda of an upcoming meeting of G-20 finance ministers. It focused on efforts to pressure China to raise the value of its currency.
This discussion implied that the United States must depend on its ability to pressure China to change its currency policy. In fact, the United States does not have to rely on China changing its policy, it can force a change with unilateral action.
Specifically, just as China sets an official exchange rate of the yuan against the dollar that is below the market value of the yuan, the U.S. could set an exchange rate of the dollar against the yuan that is equal to the market value of the yuan.
This could mean, for example that the Treasury Department would announce a policy whereby it would buy yuan at the rate of 4 yuan for a dollar. This compares to the rate of 6.7 yuan to a dollar supported by China’s government. While it would be illegal under China’s laws for its nationals to take advantage of this exchange rate, it is likely that many businesses and wealthy individuals would find ways to evade the law. This would make the exchange rate set by the Treasury the effective exchange rate in the market.
It is a policy decision by the Obama administration not to take this route. This should have been pointed out by the article. Obviously the Obama administration has chosen to not really push aggressively to raise the value of China’s currency.
China’s government knows that the U.S. can take these steps and has chosen not to, therefore it may infer that the push to raise the value of its currency is not really a priority and is instead being done for political purposes. This NYT article supports the Obama administration’s efforts to mislead the public on this topic.
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