China No Currency Manipulator, At Least Not By US Government Standards

The Treasury Department decided not to name China as a currency manipulator in a cleverly worded decision. The opinion was part of a Treasury report to Congress– the “Semi-Annual Report on International Economic and Exchange Rate Policies, consistent with Sections 3004 and 3005 of the Omnibus Trade and Competitiveness Act of 1988.”

The Report concludes that the renminbi remains undervalued. “On June 19, 2010, China took the significant step of ending its peg to the dollar and allowing its exchange rate to appreciate in response to market forces,” the document said.

“What matters is how far and how fast the renminbi appreciates,” said Secretary Tim Geithner. “We will closely and regularly monitor the appreciation of the renminbi and will continue to work towards expanded U.S. export opportunities in China that support employment in the United States, in close consultation with Congress.”Geithner’s statement actually does not matter at all. There is no evidence that China has significantly changed its currency policy since the Treasury Department decided not to name the world’s most populous nation as a currency manipulator at its last chance–April 15.

On June 19, China decided  to stop pegging the yuan to the dollar and allowed its exchange rate to appreciate in response to market forces. China seems to have provided support to keep its currency close to the value of the dollar, so what appears to be a capitulation was not really one at all.

The matter of the US government’s attitude toward the yuan will move to Congress, a place where it hardly belongs. Many members of the House and Senate have decided to usurp the Treasury’s ability to make a decision on the yuan. It is an election year, and there is some evidence that the value of the Chinese currency gives it an edge in global trade markets. This hurt US competitiveness in those same markets, and, the theory goes, hurts American manufacturing job growth. The subject is particularly sensitive as unemployment remains just under 10%.

The theory that the yuan hurts US industry have enough basis in fact that any move by Congress would have the benefit of being grounded on a solid foundation.

Senator Charles Grassley, an Iowa Republican, began to agitate for a change within hours of the Treasury decision. “I reiterate my call for the administration to bring a case against China’s currency manipulation at the World Trade Organization,” he stated. It may never make it to the WTO. Congress may force the Administration’s hand directly

It is not entirely clear to what extent Congress can do, but a vote in favor of labeling China a “manipulator” would put pressure on Obama to explain why the Treasury Departments’ decision is a valid approach to push the Chinese toward revaluing the yuan.

Geithner is on a tightrope now. The results of  sanctions against China would be severe if it was designated as a “manipulator.” China’s imports might be blocked or face severe tariffs. That would start a trade war between the two countries and destroy the uneasy relationship between them.

But the matter needs to be decided  now, and Geithner has to see if a hard line by the Administration will bring China around to a revaluation. China needs the US markets as much as American companies need its manufacturing facilities. The only important leverage the US has is that America still has manufacturing capacity of its own. It would take some time to bring all of it online enough to replace most of China’s imports. But, a willingness to rebuild America’s industrial sector would almost certainly call the bluff of the People’s Republic. The cost of the decision in the meantime would be to the America consumer.

Douglas A. McIntyre