We and other cynics were very skeptical of the pre-G20 announcement by China that it was moving to a more market-oriented currency regime at some unspecified point in the future (particularly since China had said pretty much the same thing in 2005, and actually had committed to some baby steps then).
Now that it is clear that any action will be modest and very much delayed (or worse, has high odds of being a devaluation against the dollar if the euro falls further), the US is resuming the war of words against China, and it is Obama who is now applying pressure. Before, the criticism was almost entirely at the Geithner level or below, so this relatively mild statement so close to the G20 is more significant that it appears. From Bloomberg:
President Barack Obama said the U.S. will keep up pressure on China over its currency valuation to ensure fair trade.
“If China has a currency that’s undervalued, that makes our exports more expensive, it makes their imports cheaper,” Obama said in response to an audience question at an event in Racine, Wisconsin. “So we have been putting pressure on them to say, let’s make sure that we’re not favoring one side or another.”
Obama discussed currency policy with Chinese President Hu Jintao while both were at the Group of 20 summit in Toronto last week. Some lawmakers in Congress are pressing for stronger action, including letting U.S. companies seek tariffs on Chinese imports.
Yves here. The real determinant will be economic performance. If the growth falters and unemployment rises, which we deem likely, then the pressure on the president and Congress to Do Something will also rise. And the next window for certifying China as a currency manipulator is mid-October, temptingly close to mid-term elections.
China is almost certain to resist even token appreciation, both on general principle and given that its growth is easing off. While investment is now a bigger contributor than exports (and the two together are an unprecedented level of GDP), manufacturing growth is starting to ease off. And note China engaged in extraordinary stimulus measures in 2009, pumping $1.4 trillion of liquidity into its banks system (and unlike here, applying pressure for banks to lend). The impact of the falling euro (both on competitiveness of Chinese products, and on demand as austerity measures push the eurozone into deflation) will put a crimp into the export sector just as China is throttling back on loan growth. Again from Bloomberg:
China’s manufacturing expanded at a slower pace for a second month in June, adding to signs that growth in the world’s third-largest economy is moderating.
The Purchasing Managers’ Index fell to 52.1 from 53.9 in May, the Federation of Logistics and Purchasing said in an e- mailed statement today. That was less than the median 53.2 estimate in a Bloomberg News survey of 12 economists…
Qu [Hongbin, a Hong Kong-based economist at HSBC Holdings Plc,] said “resilient” private consumption and government spending on public housing will help to sustain growth.
That outlook hasn’t been shared by investors, who sent the Shanghai Composite Index to a 14-month low yesterday. The MSCI Asia Pacific Index dropped 1.1 percent as of 10:40 a.m. in Tokyo. The world is relying on China to help sustain a recovery that Group of 20 leaders this week described as “uneven and fragile.”