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China’s Renminbi Announcement: A Big Headfake

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The Chinese central bank made a vague announcement about its currency policy on its website today, which the officialdom, on cue, treated as a major move (to wit: “China vows increased currency flexibility” at the Financial Times, “Chinese say they intend to free up their currency,” Washington Post).)

As we describe below, this “announcement” is basically a non-statement to silence Westerners calling for a revaluation in the runup to the Toronto G-20 meeting later this month.

This is the full text of its English version:

In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.

Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role.

When the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the U.S. dollar depreciated by varying margins. The stability of the RMB exchange rate has played an important role in mitigating the crisis´ impact, contributing significantly to Asian and global recovery, and demonstrating China´s efforts in promoting global rebalancing.

The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.

In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.

China´s external trade is steadily becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010. With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist. The People´s Bank of China will further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.

Yves here. There are some real internal inconsistencies. While this does represent an announcement of an intent to liberalize, it lacks any particulars as to timing and mechanisms. Moreover, it specifically rejects the idea of widening the bands in which the RMB trades, which is the litmus test of a move to a market-based exchange rate (you’d expect gradual widening of the permitted band as a precursor to abandoning currency intervention).

Instead, what this appears to signal is a shift of the basis for managing the currency to:

1. Use of a basket of reference currencies, rather than just the dollar. China is contending that that is what it has been doing since 2005, but the language allows for the possibility for a change in the mix. Thus this signals China’s intent to move away from a dollar reserve currency regime (it has taken other measures along these lines, for instance, encouraging invoicing in currencies other than the dollar). The problem is that a permitted trading band vs. a basket of currencies is what China supposedly implemented in 2007, and the results have looked an awful lot like a dirty float against the dollar.

2. Arguing for the balance of payments as the metric of the appropriateness of the exchange rates. China contends that because its balance of payments is improving (as in its trade surplus is weakening) it really does not need to do much (as in it has ruled out a meaningful revaluation). This is essentially an argument that the large trade deficit for March means critics need to lay off, a posture it took in April. The problem, however, was the March deficit appears to have been the result of one-off factors. China’s exports in May were larger than expected, due to more robust export growth. And note Chinese officials had expected exports to rise 50% over 2009.

The fact is, as Michael Pettis pointed out in his latest post, no country in modern times has ever run a trade surplus as a percent of GDP as large as China does. That means even if it does decide to extricate itself from this position, it will want to do so gradually. As Pettis noted:

As a share of global GDP China’s recent trade surpluses (roughly 0.6-0.7% of global GDP) are easily the highest recorded in the last 100 years.

This is all the more striking when you consider that the two previous record holders, the US in the late 1920s (with a trade surplus equal roughly to 0.4% of global GDP) and Japan in the late 1980s (0.5% of global GDP), were relatively much larger economies. The US represented more than 30% of global GDP in the late 1920s, and Japan represented 15% of global GDP in the late 1980s. By contrast China represents only 8% of global GDP today.

In the same post, he also rejected the idea that China’s trade balance is moderating:

In other words the cost of capital for China’s already too-capital-intensive and overinvesting economy is declining, and so worsening the domestic imbalances, and all but assuring that China’s trade surplus excluding Europe will surge (and maybe even including Europe it will still rise). In fact one of the least surprising of the “surprises” of recent months was China’s May trade figures. Here is what an article on Thursday in the South China Morning Post says:

Mainland’s exports rose 48.5 per cent in May from a year earlier and imports were up 48.3 per cent, the General Administration of Customs said on Thursday, giving the country a trade surplus of US$19.53 billion, up from just US$1.7 billion in April. The median forecast of 32 economists polled by Reuters was for exports to rise 32 per cent and imports to climb 45 per cent, with a projected trade surplus of US$8.8 billion.

Sources said on Wednesday that export growth was up about 50 per cent from a year ago, giving a boost to global financial markets as investors expressed relief that the country’s fast growing economy did not appear to be juddering to a sharp halt.

Some surprise, although I should add that I have a worrying feeling that the subsequent applause by the global stock markets may have got it exactly backwards. Net exports had to surge after the temporary contraction earlier this year, and in fact if you exclude the impact of commodity stockpiling, which overstates outflows due to consumption imports and understates outflows due to investment, China’s trade surplus would have probably been much higher. It is being artificially reduced by commodity stockpiling, which of course must be reversed at some point in the future. I expect that Chinese net exports will continue very strong this year, perhaps even taking into account the effect of the European crisis, which should be excluded from the number. And of course I expect US net imports, and with it US unemployment, will surge to politically unacceptable levels throughout this year and next, thanks in large part the European crisis and the unwillingness of anyone else to absorb it.

Yves again. With this as background, there is a completely different way to read the China announcement. Start from the top:

Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role.

When the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the U.S. dollar depreciated by varying margins. The stability of the RMB exchange rate has played an important role in mitigating the crisis´ impact, contributing significantly to Asian and global recovery, and demonstrating China´s efforts in promoting global rebalancing.

Yves here. First, the “basket of currencies” talk is technically accurate but misleading. China allowed for a widening of the band against the dollar and a smidge of appreciation. And the talk on what happened during the crisis is more than a bit of a distortion. China is effectively contending that by keeping its dollar peg during the crisis (when the dollar was rising, which was to China’s disadvantage) it was being a good soldier and “promoting global rebalancing”. Huh? Although China’s trade surplus shrank in early 2009, the big story of trade during the crisis was: 1. Trade volumes plunged and 2. China’s surplus in quite a few months was at record levels. Why? Pretty much every other trade surplus nation saw its surplus collapse (Japan in particular, as its yen soared) and China got a disproportionate share of what trade there was. Calling that an effort to promote global rebalancing is a serious distortion. (By the way, old Asia hands will recall the US unwittingly promoted this construction, that of keeping a dollar peg when other currencies were depreciating as being pro-stability, during the 1997 Asian crisis, when China no doubt considered devaluing the renminbi, but stood pat at the US’s request).

So as I read this announcement, China has committed to do…..absolutely nothing. In fact, this language could just as easily be used to justify shifting its dirty float to be against the dollar (which is now comparatively strong and will continue to be so as long as the eurozone is on its austerity kick) to putting greater weight upon the euro in its basket, which would lead to a devaluation against the dollar. Note I am not saying that will happen, but the announcement does not preclude that idea if China’s trade surplus were to deteriorate.

Notice the goals the PBoC commits itself to meet:

….further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.

Yves here. Note the contradictions: you can’t have the market play a “fundamental role” in setting FX rates, and “maintain the RMB exchange rate basically stable.” And China is not going to make any moves that compromise “macroeconomic and financial stability in China.”

I’m not the only observer to read this announcement cynically. From the Wall Street Journal:

Beijing’s move may not, however, result in a large appreciation of the yuan. Cornell University economist Eswar Prasad, former head of the International Monetary Fund’s China division, cautioned that Beijing is returning to a policy of linking the yuan to a basket of currencies, without identifying the composition of the basket.

About a quarter of China’s trade is in euros, a currency that has been in a steep slide against the dollar recently. If the euro composes a large share of China’s invisible basket, the yuan could actually weaken relative to the dollar, Mr. Prasad warned.

“If the world now says, ‘Let your currency float against the dollar,’ the Chinese could say, ‘Do you really want it to depreciate?’ ” Mr. Prasad said, describing Beijing’s move as “canny.”

Mr. Prasad said China’s main concession was therefore not the content of its new policy, a return to the one that was in place before the global financial crisis. Rather, Beijing’s principal shift was in the timing, offering at least a symbolic gesture ahead of the summit in Toronto next weekend of leaders from the Group of 20 major industrialized and emerging economies.

“They’ve actually accomplished two significant objectives,” Mr. Prasad said. “They”re taking away the political heat, but without significantly affecting their export competitiveness.”

So what does this announcement really achieve? Buy time. As we noted, there was a firestorm of criticism in Washington over the sharp rise in Chinese exports in May. This announcement comes right before the G20 meeting, where China was sure to come under attack if nothing appeared to have changed. The Administration really does not want a row with China right now; Geithner was clearly reluctant to brand China a currency manipulator (as he was being pushed to do by Congress in April, when China miraculously announced a trade deficit right before the required Treasury semi-annual window) and now has even less reason to want to, given that we are looking for China’s support in the row between North and South Korea over North Korea’s alleged sinking of a South Korean warship and in sanctions against Iran.

So not surprisingly, the Administration is playing along and touting this non-commitment as meaningful. From Bloomberg:

Geithner, in a statement, praised China’s decision and added that “vigorous implementation would make a positive contribution to strong and balanced global growth.” The Obama administration received advance notice of the announcement, U.S. officials said.

And analysts are also talking China’s book while pointing out that this takes the heat off China for now:

“It makes it a lot more difficult for Washington and Congress to do China bashing,” {Goldman Sachs Group Inc. Chief Global Economist Jim] O’Neill said. “The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world.”

Yves here. But as Pettis pointed out, China has been increasingly reliant on investment as a source of growth, simply unheard of levels relative to GDP. And he points out another not widely recognized fact: this actually impedes the process of shifting to more consumption, which is necessary for China to become less export oriented (ie, it has plenty of opportunity to sell goods internally if it can increase income levels and consumption rates over time);

More importantly, China’s financial repression is also at the heart of the imbalance in the Chinese economy. By transferring large amounts of wealth from the household sector to net borrowers (perhaps as much as 5-10% of GDP annually, as I explain in an earlier entry), it creates the large growth differential between national GDP and household income that is at the root of China’s very high savings and very low consumption levels.

I should add that if much of this investment is non-economic, as I believe it is, this will exacerbate even further the differential. Why? Because the total economic cost of the investment (which must include the real debt forgiveness implied by excessively low interest rates), and which will be borne over the future as the cost are amortized in the form of debt repayment, exceeds the total economic value of the investment (which must include externalities), which will accrue upfront. This means that we get more investment-driven growth today and less consumption-driven growth tomorrow.

Yves here. The Chinese officialdom clearly can, at any point, announce and implement policies to move the RMB either higher relative to other currencies and/or allow wider trading bands as a way to move towards a less controlled currency regime. But I don’t see any reason to expect it to happen until China gets more pushback from its trading partners. Their enthusiastic responses to this noncommittal announcement seem likely to insure that has been kicked down the road until China’s continuing trade surpluses force politicians to turn the heat back on.

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21 comments

  1. Abhishek

    China is just seeking to play for more time and space as intl pressure piles up.It is tough if not impossible for China to appreciate its currency at present with the Euro depreciating by 20% against the dollar and the yuan.Europe is a bigger export market for China than the US,so its export industries are already facing huge problmes.http://bit.ly/b64vq3

  2. danny

    The point of timing the currency announcement around the G20 meeting is to give the G20 credibility as a forum for solving global issues individual nations cannot.

    The elite engineer crisis’ no individual nation can solve or which need a consensus of nations to force an issue on isolated nations.

    As the G20 gains credibility for effectively dealing with global issues it will be changed to have real power something like the European Commision but of the whole world. This is how the elite will circumvent the democratic processes of nations and control the world in due time.

    1. psychohistorian

      I agree generally that the elite conspire to control the world but am not sure that the G20 is their vehicle to circumvent democratic processes of nations. I believe that multi-national corporations are more the vehicle through which nations are played off against each and manipulated to the detriment of the public at large. These corporations are owned and morally/ethically directed by the world’s elite.

  3. Joseph

    It is widelly said, and current belief, that China is guilty of the loss of jobs and rising imports in the western countries; wrong¡
    Global coroporations, pushing globalization as free movement of capital, workforce and goods are the ones largelly profitting from in, not China
    the chinese goverment is slowly moving towards a more open trade, more imports, a higher level of wellfare and salaries within their country….The PC are far from being stupid, either they perform, or they are out
    Again is widelly believed, that corporations want that remimbi revaluation to come at once, wrong again; what they want, brothers in arms, together with the anglo finantial centers, is that they open their stock mkt, currency trade, and banks to the west; they will never get it, the chinese know very well who ( with names and surnames) have buggered us, they will never let them in
    Prevailing mainstream flow in the west, using globalization and free market as free monopoly, will never outcome in China, thanks God
    By the way, China still remembers well the 100 years of ocuppation by the 8 western powers as a nightmare; troubled times with famine, political turmoil, through currency manipulation a net importing country….
    If Zhong Guo didnt exist, the real entreperneurs we would miss it, they are back to basics, which is what we should all do; Wo shi nian ni Zhong Guo¡

    1. sgt_doom

      Excellent points, good citizen.

      While the multinationals use China to increase their profits and neofeudalize the rest of us, China has always behaved in their overall best interests, something the Americans are too Ameritard stupid to figure out.

      The Volvo event is the perfect example — although there are an almost endless number of them now. (Volve opens auto factory in China, Chinese techs and engineers study and copy Volvo auto and industrial mfg. processes and design, opens up competing factory, Volvo loses $1 billion – ditto various German and British utility companies, etc.)

      Nope, the Chinese military, which owns the vast majority (perhaps all?) the factory and production facilities in China, call the shots, (just like in Pakistan, BTW).

      Not unlike the US Pentagon (D.O.D.) which is the largest overall owner of land and mfg. in the USA (and to think most of the Ameritards are still unaware of that!).

      Great Yves post, of course!

      1. Joseph

        I am an european citizen, living in Spain, by the way¡
        keep well
        remember Jeffersons words
        if we leave the banks…..

  4. Moshi

    You are right to emphasize the reference to market forces playing “a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China”. The setup here is for an expansion of the offshore RMB programs already introduced to a limited extent in Hong Kong, Singapore and key trading partners in ASEAN and South America.

    There will be no change soon in the currency bands, but the bands will be increasingly tested by market forces, including new offshore RMB accounts for corporate users based outside of China, expanded permission to issue RMB denominated debt, offshore RMB futures markets to complement CFETS and the establishment of an offshore yield curve distinct from the domestic strictly managed curve.

    This is a significant announcement, not because the PRC is moving the previously established currency bands but because PRC officialdom is increasingly willing to allow market forces to inform critical economic policies such as the exchange rate. It can also be viewed as a clear refutation of the recent calls by the Russians for an entirely new international reserve currency. The PRC clearly prefers to see the RMB become a reserve currency in its own right over time. Consider the call by the Russians for an equal partnership in this effort to be declined.

  5. Chartist

    Westerners, even highly advanced analysts and pundits, waste their time trying to explain what China means and does without years of knowledge of the culture and how it operates. Watch what it does and not what it says! UN to USA to the EU, all waste their time thinking they know what PRC is up to by listening and reading reports from their CI.

    1. sgt_doom

      “Westerners, even highly advanced analysts and pundits, waste their time trying to explain what China means …”

      Negative, sonny, that’s simply window-dressing (eye candy, smoke and mirrors, dog and pony show, ad infnitum) to fool the rubes like you, who are actually wasting valuable time paying attention to such nitwits-for-hire-paid-to-write-and speak-drivel (proof of concept, hence they’ve been successful).

      America is promulgated (and other Western countries similarly) on the foundation-stink tank system, which manufactures consent and reality (with over 50,000 foundations spewing forth, and numerous “think tanks” — Geo. Weasel Bush having opened the latest one – which should tell you something, chump!).

  6. reskeptical

    On the radio here in Southern Germany- ‘there has been a dramatic increase in demand for luxury cars- manufacturers BMW, Audi and Daimler are all putting on extra shifts, etc.’

    1. mhead

      Makes sense — the RMB price of those prized luxury marques is declining thanks to euro devaluation, as it is in other currencies.

      But it goes to show that euro devaluation may benefit Germany more than the suffering Club Med EU members. They would have to export an awful lot of wine to equal the price of a Beemer … and wine is a less distinctive product, with plenty of upscale competition.

      Meanwhile, few are considering the possibility of exchange rate overshooting. Could the RMB experience what the US dollar did in 1985 — getting bid up so high that an international powwow was convened at the Plaza Hotel to beat it back down?

      To answer my own hypothetical, probably not now, as long as China keeps its heavy-handed panda mitts on the exchange rate. But it makes me profoundly nervous when Timmy Geithner challenges the Chinese to see ‘how far and how fast’ they can revalue the RMB (i.e., depreciate the dollar).

      Be careful what you wish for, Timmy!

  7. S Brennan

    Exchange rates to tariffs are what thermo-nuclear bombs are to THAAD missiles.

    Thank God generals on both sides of major conflicts aren’t as dumb as the smartest NeoCon believing buffoon.

    If we wanted to solve the balance of trade problem [and we don't], the resolution would days/weeks. China is in no position to retaliate to the use of tariffs…yes they could cut us off from consumer goods…and the world would thank them, as they ate their lunch.

  8. alex

    In short, China utters some vague talk and will probably do little or nothing. Is there anybody actually dumb enough to be convinced by Act 247 of Chinese political theater? Or does it just give Geithner, et al, a tiny fig leaf to excuse their utter inaction?

    P.S. I thought Pettis’ point about the sheer magnitude of China’s surplus was interesting. Can there be any doubt about the sheer magnitude of their currency manipulation and its ramifications for the American and world economies?

  9. Namke von Federlein

    “Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.”

    and…

    “In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies.”

    I might translate it like this : When the IMF (US in thin disguise) can get a working SDR then China will float the RMB against it. In fact, China would be happy to trade their USD for working SDRs?

    In other words : If the US can’t even get the SDR to work then they should stop bothering China about currency issues. After all these years, the US (via the IMF) has not demonstrated competence on currency matters. Just try and price something in SDR (like your own net worth) and you will see what I mean.

    Over the next 6 months, I would suggest that China will let the RMB appreciate about 5% to a) provide a small deflationary factor and b) increase the economic weight of China.

    And I personally feel that China is accurate about the stability that the peg provided during the worst of the Liquidity Crisis. It was “one less thing to worry about”.

    Perhaps the IMF does the following already? : IMHO the SDR needs to factor currency purchasing power into the SDR calculation. Secondly, the IMF needs to explicitly collaterise the SDR. Selling off the gold is crazy? How can China (or anybody else) feel about the IMF selling off the backbone of the SDR? I’m certainly not a “gold bug” but I would suggest that it helps with the problem of “explicit collateralisation”.

    China’s “stockpiling” is actually the way that they are building up collateralisation for the RMB? If the IMF can’t create a working “basket of currencies” then China will create an international Chinese trading unit (ie a currency unit to be used only for international trade) based on a “basket of commodities”?

    IMHO there is exactly and only one viable way for the US to come out of their solvency crisis and economic crisis. The next few weeks and months will prove very enlightening?

    Lots of questions. Thanks for your nice blog! I was quite undecided about whether or not I should comment on this but I figure that the questions might be good for a smile. That’s all, really. I thought about if for a bit and then I figured that they might make you smile. Don’t ask me why. Just a hunch.

    May all beneficial wishes come true in beneficial ways!

    Namke von Federlein

    1. Yves Smith Post author

      Namke,

      Thanks for your comment. However, let me make a few observations that are at odds with your argument:

      1. You may note that the announcement referred to a June 2005 policy change. China did not actually implement the change till the second half of 2007 (IIRC, September)

      2. China said in the announcement and they day before that there would not be much if any appreciation and this was not a “G20 issue”

      http://news.xinhuanet.com/english2010/video/2010-06/19/c_13358076.htm

      3. Countries that issue their own currency like the US cannot have a solvency crisis. They can, however, create considerable inflation if they “print” too much.

      1. Namke von Federlein

        Just “trying these ideas on for size” (like a bathing suit). It’s all quite an interesting puzzle!

        1. I find it interesting that China referred to their 2005 announcement in the current announcement. China can’t de-peg because currency markets are still too volatile? If you have companies on 5% margins then the hedging costs eat your profits. The banks would eat all of the profits?

        IMHO the comments by Mandarin summarise the key ideas of this concept very nicely.

        2. I agree that it is not a G20 issue. It is an IMF issue.

        I think that the SDR has failed because the SDR “basket of currencies” are factored back into trade volume calculated in USD. This means that world trade would be dependent on sound money management by the US – something which is simply not true. (The US uses credit and volatility as a weapon).

        By adding purchasing power into the weighting, the SDR would have better reflected value in the global economic system. This would have made it more accurate for pricing?

        Not to mention the need for explicit collateralisation (which was the original purpose of holding gold).

        So, it would seem that China is turning its back on the SDR. Hence the two references to the “basket of currencies” in a historical time-line?

        3. The US has three problems : liquidity, solvency and economic (jobs, productivity and income distribution)? IMHO the Fed has the liquidity problem under control.

        I’m using solvency in the business sense, not the technical economic sense. The US (from top to bottom and at all levels) is broke. Total debt (including consumer debt) is 320% of GDP. And this debt is leveraged at 20-40:1 into the OTC market. Not even inflation can eliminate this debt. The inflation needed would destroy the economy.

        Not to mention that the topsoil is almost gone, the water and air are toxic, the prison population exceeds the total population of many countries, the constitution seems to be nothing more relevant than a footnote in US history, etc.

        On the positive side : I still see one way that the US could put a floor under their problems. But that window of opportunity is now closing. May Americans come up with a clever solution to their solvency and economic problems!

        4. If I was the Minister of Finance of China I would do the following :

        I would use commodity stockpiling to make certain that my monthly balance of payments stayed at zero. Then I would slowly appreciate the RMB. The money I would lose on my USD holdings would be balanced by the slow and steady inflation in commodity values that I would be creating.

        This strategy would also make it possible for China to stop funding the US debt. Over time, I would be holding a tremendous position in commodities and no USD. The RMB would be the only fully and explicitly collateralised currency in the world. The collateral would be “above ground primary input” assets and not some mythical “in the ground assets” (like at the Fed).

        Finally, I restrict the RMB and use it as a currency for internal Chinese transactions and create a new “international RMB” for global trade. That way, I could manage internal liquidity and economic issues independent of the never-ending global trade wars.

        In other words, you cannot do income redistribution effectively if your currency is also used for international trading? China needs to ensure that the net worth of individual Chinese needs to increase at a steady and meaningful pace to ensure economic, political and social stability?

        So, we’ll see what comes next. Right now, I see very positive outcomes possible for the US, Europe and China over then next 12 months. In fact, the my only concern right now is that the US elite will miss their opportunity and (essentially) go into a very chaotic panic mode. It would be very unfair to US citizens. IMHO American citizens don’t deserve that.

        May all beneficial wishes come true in beneficial ways!

        Namke von Federlein

  10. Mandarin

    The USA runs a trade deficit with all its large trading partners. The monthly US deficit on the import of oil is roughly equal to its monthly trade deficit with China.

    The USA April monthly trade deficit with Mexico was a bit over $5 billion. The April deficit with China, a country 20 times larger, was $19 billion.

    Having lived for some time in China and transacted business in RMB, the evidence of a rigged and undervalued currency is clear. However, the US track record with market-based currencies is hardly better.

    The goat in the currency spat isn’t the value of the Yuan RMB and only slightly is it the trade balance in goods. It is the ability of American megabanks to freely speculate in the Chinese currency and to gain access to Chinese capital markets and the pool of Chinese savings. Were this to happen, the Chinese authorities would completely lose their ability to direct their socialist market. The country would become subject to unrestricted and upredictable capital flows, and domestic economic policies would be dictated by the “market” – read the biggest banks and their political enforcement arms like the IMF.

    I completely understand the sense of outrage some Chinese nationalists attach to this debate. So more is the pity that China is being blamed for all the sins of the American political economy. Perhaps worse – their currency policy is used as red herring to cover a drive for profit akin to gunboat diplomacy.

  11. purple

    Perhaps worse – their currency policy is used as red herring to cover a drive for profit akin to gunboat diplomacy.

    Nation-state capitalism has more often than not been based on plunder and violence. If it was based upon producing excellent products at reasonable prices then China would have ruled the world long ago. Unfortunately, they stopped developing a Navy about 600 years ago and used gunpowder for firecrackers.

  12. Samuel Morales Jr.

    Looks like you are wrong Yves Smith. China did unpeg the dollar. Better luck next time. Unpegging to the dollar will hurt the USA more than it hurts China, because it will be more expensive for the americans who been consuming on chinese goods at a discount.

    1. Yves Smith Post author

      No, China did not unpeg, not even close. There has been massive misreporitng in the media and cheerleading among analysts. As I noted in Links for 6/21:

      The Journal, as Duy pointed out, said that the PBoC set the dollar-RMB parity rate at the same level as Friday. 6.8275. The Financial Times weighs in with, “Renminbi unchanged despite policy shift.” Bloomberg, by contrast, is wildly cheerleading the fact that the currency has moved in intra-day trading to 6.803. Given that the RMB is allowed to move .5% a day v. the dollar, this is still within the permitted band.

      So:

      1. China still has a peg.

      2. China did not change the level of the peg

      3. China does permit the RMB to move within a permitted band. Traders pushed the RMB to the high end of the permitted band.

      So there not only has been no unpegging, there also has been NO change in the level of the peg.

      Not a single thing that happened Monday represents a change from the regime in place prior to the weekend announcement.

      I said China could later take action, but their statement committed them to do absolutely nothing.

      And the changes they alluded to in their 2005 regime change were not implemented until 2007. Even if they do decide to Do Something, there is no reason to assume it will happen anytime soon.

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