US Declines to Label China a Currency Manipulator

Friday, July 09, 2010

As anyone in the textile business knows, China is the preeminent producer and exporter of fabrics and made-up apparel products in the world today. But Chinese textile export performance has been assisted by a controversial foreign exchange policy that fixed the Renminbi (RMB) to the US Dollar for a number of years -- a practice criticized by some who claim that the policy artificially lowered the value of the RMB, thus making Chinese textiles and other manufactured products cheaper than would otherwise have been were the RMB not pegged to the US Dollar.

Well, after some hand-wringing and high-level negotiations with the US and others, China last year agreed to let the RMB float opposite the US Dollar. Though the Chinese currency initially gained value it went back to a relatively unchanged state after its initial appreciation. Recently, however, China indicated that it would let the RMB float even more independently than before with the result that the RMB has appreciated slightly more in value.

Yet despite these recent developments, the politics over the RMB-Dollar exchange rate continue to churn. However, in a sign that the controversy may be at least temporarily easing, the US Treasury Department this week issued its long-delayed report on international exchange rates.

I want to thank David Spooner of Squire Sanders & Dempsey for the following detailed analysis of the US announcement: In declining to label China as a currency manipulator in the wake of China's recent announcement that it would return to a more flexible and market based exchange rate regime, the US Treasury report was, interestingly, accompanied by a statement from Treasury Secretary Timothy Geithner, declaring that the renminbi is undervalued and that China must expeditiously permit the renminbi to appreciate.

China's recent loosening of the renminbi's peg and Secretary Geithner's public expression of concern yesterday may only yield a short delay in congressional efforts to pass China currency legislation.  Senator Charles Schumer (D-NY), who along with Senator Lindsey Graham (R-SC) has spearheaded Senate efforts to penalize China for its currency policy, called Treasury's report "as disappointing as it is unsurprising."  Senator Charles Grassley (R-IA), the ranking minority Member of the Senate Finance Committee declared that "Congress will have to act" if the President "continues to avoid acknowledging China's currency manipulation."  Chairman Sandy Levin of the House Ways & Means Committee issued a statement calling on the Administration to explore a WTO case against China's currency policy.  Secretary Geithner himself, in the statement accompanying the currency report and in the report itself, declared that "[w]hat matters is how far and how fast the renminbi appreciates," perhaps only inviting congressional pressure in the not-too-distant future (though it's worth noting that Secretary Geithner also stated that it will take time to assess the impact of China's recent policy changes).

The core portion of Treasury's exchange rate report recounts China's recent currency actions and then continues:  "Exchange rate appreciation should play an important role in rebalancing China's economy towards domestic demand-led growth. It could also expand China's ability to set an independent monetary policy appropriate for Chinese economic conditions. As China's recovery strengthens, moving further to a more flexible, market-determined exchange rate would give monetary authorities greater scope to maintain price stability. This is particularly important in the short-run as China's economy grows above trend, and inflation is rising... Greater flexibility of China's exchange rate should also reduce incentives for foreign exchange intervention by other countries trying to maintain trade competitiveness vis-à-vis China, contributing to sustained and more balanced global growth."

Links to primary source documents are below:

1.  Treasury's Report on International Exchange Rates:

2.  Treasury Secretary Geithner's Statement Accompanying the Report:

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