Paulson Hoist on His Own Petard (Yuan Version)

One of the Treasury Department’s big campaigns has been to put pressure on the Chinese to allow the yuan to float more freely (the Chinese now engage in a dirty float in place of their former hard peg).

Most analyses of the value of the yuan show it to be undervalued, some by as much as 40% relative to the dollar. Congress, unhappy about the huge trade deficit with China, has threatened to impose sanctions if China does not allow its currency to appreciate. (Aside: this desire for a rise in the yuan falls in the category of “be careful what you wish for,” since a lower trade deficit also means lower capital inflows. In other words, kiss cheap foreign funding goodbye).

China responds badly to threats, so Paulson looked to the IMF to act as an honest broker. But that move has backfired spectacularly, with the IMF declaring the dollar to be overvalued. The focus was supposed to be on the yuan and how the Chinese needed to stop meddling; now it has shifted to the dollar, and by implication, our low savings rate (the Chinese have taken the position that it is we, not they, that need to get their house in order). And since the US hasn’t gotten what it wanted, it is now demonizing the very organization it once touted as expert and fair.

From Bloomberg:

Treasury officials recruited the IMF to be a currency cop as China and other countries meddle with exchange rates to gain a trade advantage. Instead, the international lending organization took aim at the dollar, calling it overvalued in an Aug. 1 report….

“The U.S. Treasury has cut the legs from under the IMF before it even started the race,” said Michael Mussa, the IMF’s chief economist from 1991 to 2001 and now a fellow at the Peterson Institute in Washington. “This was foolish and unnecessary when they could have just said nothing.”

By rejecting the IMF’s analysis, the Treasury may have jeopardized its own effort to use international leverage to help narrow China’s $118 billion trade surplus with the U.S. Members of Congress are threatening sanctions if the Treasury doesn’t succeed in getting China to stop suppressing the value of its currency….

IMF staff economists told U.S. officials in meetings ended July 27 that their research showed the dollar was 10 percent to 30 percent overpriced, according to an account included in the 54-page Aug. 1 report

For my money, the richest bit of irony is this comment:

Mark Sobel, a Treasury deputy assistant secretary, told Congress Aug. 2 that, while exchange-rate modeling offers “valuable insights, there is no reliable or precise method for estimating the proper value of an economy’s foreign-exchange rate.”

That was clever. The Treasury has just said there is no way to determine what a currency’s value should be, which means it has no basis for telling China its currency is too cheap. Can we all go home now?

Print Friendly, PDF & Email


  1. Steve Waldman

    At first blush, this just seems dumb. After all, the statements “the yuan is undervalued against the dollar” and “the dollar is overvalued against the yuan” are entirely equivalent.

    But the politics might be brilliant. After all, Treasury officials know they need to be careful about what they wish for. It is politically intolerable right now not to oppose the “undervalued Yuan”. Treasury has to wage a battle they’d prefer not to win. So, they use a twist of phraseology to make throwing the fight a matter of national pride.

    If I didn’t think changing the status quo “global imbalance” was urgent, I’d tip my hat at the artistry. As it is, you’ve drawn from me yet another sigh.

  2. Anonymous

    sobel was responding to congressional pressure to pin China as a manipulator, and the treasury’s (legalistic) defense has hinged on a combination of “we cannot determine china’s intent — so we cannot determine if it has been intervening b/c it intends to maintain a competitive advantage” and “there is no consensus on whether china is undervalued, or by how much” ergo no manipulation and please don’t impose 30% tariffs.

    the comments by the unnamed senior treasury official in the imf report were incredibly stupid, and i am pretty sure that they didn’t come from sobel (full disclosure, sobel was my boss in 2000-01). mussa is right — if the US is going to argue that the $ isn’t overvalued, it can hardly argue that other countries currencies are undervalued.


  3. Yves Smith


    Apologies for not drafting the piece clearly enough to highlight that the issue was Treasury’s self defeating response rather than the IMF saying the dollar was overvalued. The perils of posting after midnight.

    Treasury clearly did not anticipate that the IMF might conclude that the dollar is overvalued generally. Why this would be a bad outcome, given our trade deficits, isn’t clear to me, but this exercise was clearly about getting the yuan to appreciate, period. I haven’t followed the currency debate in a granular fashion, but I don’t recall Treasury ever objecting to the characerization of China as a currency manipulator (by implication, if you say a country has a cheap currency and they need to let it appreciate is more or less saying they are manipulating). Saying that the dollar is overvalued takes the air out of that argument.

    Or wore this move was about appeasing Congress and Treasury panicked when the focus and the discussion when down another path.


    I was remiss in not putting the link to the Bloomberg piece in. That’s been corrected.

    Reading the Bloomberg piece again, I missed the significance of the Aug 1 IMF report, Aug 2 congressional testimony sequence. The Aug 2 session had to have been set well in advance, so Treasury had just gotten the IMF report the day before. Clearly not enough time to do the normal scripting of answers to likely questions. Probably hard to duck if a Congressman is waiving a 54 page report at you.

Comments are closed.