Currency manipulation? The US may have more to answer for than China
- China has an increasingly balanced current account and a stable currency – none of which points to currency manipulation, whereas the US has arguably used quantitative easing to keep the dollar weak
But has China really been a currency manipulator?
The US uses three criteria to determine if a country is a currency manipulator: it must have a large trade surplus with the US; a large overall current account surplus, and; has intervened actively in the currency market.
It returned to a surplus of less than 1 per cent in first quarter of this year, due to accelerated shipment of exports to the US in anticipation of higher US tariffs.
Correspondingly, Chinaâs current account surplus has also declined from about 9.5 per cent of its GDP in 2007 to less than 0.4 per cent last year. Chinaâs balanced international trade is credible empirical evidence that the yuan exchange rate is neither undervalued nor overvalued.
A currency manipulating country would presumably be keeping its exchange rate under equilibrium value to make exports cheaper and imports more expensive, gaining an advantage in international trade.
Such a country would have a large and persistent trade surplus vis-Ã -vis the world. A large bilateral trade surplus alone is insufficient to determine whether a currency is undervalued, or a country has been a currency manipulator.
In this sense, China cannot be considered a currency manipulator.
The deviation of the yuan central parity rate from the CFETS index has remained within a 2.5 per cent range since July last year, even though the yuan has lost about 6 per cent against the US dollar (from 6.6 to 7.0 yuan).
The yuan no longer follows the dollar rigidly because the US accounts for only slightly more than 20 per cent of Chinese international trade.
If the yuan were to be strictly pegged to the dollar, when the dollar appreciates with respect to other currencies, Chinaâs exports would become more expensive for the customers that account for almost 80 per cent of its market, which makes very little economic sense.
Similarly, when the dollar weakens, Chinaâs exports would become cheaper for the majority of its customers, which also makes very little economic sense.
Moreover, China will have to pay even more for its imports of agricultural goods, oil and gas, and semiconductors not only from the US but also the rest of the world.
A popular myth about the onshore renminbi exchange rate, especially among currency speculators, is that 7 yuan to the dollar is a red line that the Peopleâs Bank of China will defend.
My former colleague at Stanford University, Professor John B. Taylor, who served as undersecretary of the US Treasury for international affairs (2001â2005), recently published an insightful book Reform of the International Monetary System: Why and How?
In his preface, Professor Taylor reported the late Dr Allan Meltzer, another eminent economist, as saying that, through quantitative easing, US Federal Reserve Board policymakers have been engaging in âcompetitive devaluationâ of the US dollar.
The low interest rate set by the Fed under its quantitative easing encouraged capital to seek higher yields.
If the US had capital controls, the capital released by quantitative easing would have stayed in the US and increased domestic investment â and not resulted in the devaluation of the dollar.
This is currency manipulation par excellence â a subtle but successful manipulation of the relative exchange rates without direct intervention in the currency markets.
Lawrence J. Lau is Ralph and Claire Landau Professor of Economics, Lau Chor Tak Institute of Global Economics and Finance at the Chinese University of Hong Kong