August 11, 2015
One of the most bizarre debates in national politics is over whether China “manipulates” its currency. It is bizarre both because of the term used and also because the fact that China manages its currency is really not a debatable point.
The use of the term “manipulation” is bizarre because it implies that China is doing something sneaky in the middle of the night when no one is looking. There actually is nothing sneaky about it. China openly targets the value of its currency at a level that is well below the market clearing rate. The question is not whether we can somehow catch them in the act, the question is what do we think about the policy.
Anyhow, China just gave deniers another degree worth of global warming to explain away when the bank lowered the target rate for its currency against the dollar in order to boost its economy. There are three points worth making here.
First, China is quite obviously acting in currency markets to keep down the value of its currency. Do we have to pretend we didn’t see this? The $4 trillion in reserves that China’s central bank was sitting on should also have been a big hint on this issue. (For those who confuse the importance of stocks, rather than just flows, almost everyone believes that the Fed’s holding of $3 trillion in assets puts downward pressure on U.S. interest rates. It’s the same story with China’s central bank’s reserves and China’s currency.)
The second point is that China’s government obviously believes that the relative value of its currency affects its trade balance. That also should not really be arguable, but there were some policy experts who believed that imports and exports from China are not affected by relative prices. Of course they may still be right, but this move demonstrates that China’s government does not agree with them.
The third point is that several other currencies moved in step with China’s currency against the dollar. This contradicts a common assertion that if China raised the valued of its currency against the dollar then we would just import more from other countries. In fact, since many countries’ currencies follow the Chinese yuan, the improvement in the U.S. trade balance with China that would result from a higher yuan is likely to be amplified by an improvement in our trade balance with other countries as well.
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