Today, the Treasury Department issued a report stating that China's currency peg is close to what it would classify as manipulation of foreign exchange. The currency peg has been around since 1994, but the growing trade deficit and political pressures in the U.S., especially from the manufacturing (export-competing) industries, is bringing the issue to a head. There are two trends that created this problem. First, China is growing and exporting more as they become more efficient at manufacturing. Second, the U.S. is spending much more than it earns. When you spend more than you earn, your currency tends to devalue. China is pegged to the dollar so it also devalues. And since Chinese goods get cheaper as a result, especially to non-pegged currencies such as Euros, its exports increase.
It's important to see that the U.S. is partly to blame by becoming the biggest debtor nation in the world, but there's not a mention of this anywhere in the Treasury Department report nor in the general U.S. media. Yes, China should move off of the peg, but the U.S. has to balance its budgets and increase national savings. Those Bush tax cuts and ballooning war costs are partly responsible. Hearing the U.S. Treasury Department simply talk about the Renminbi Peg is like watching two drunk drivers crash into each other and one yelling to the other, "Hey, you're drunk!"
On a side note, if China adjusts its peg expect to see a lower demand for American Treasury Bills and thus a rise in the interest rate here in the U.S. When your line of credit gets cancelled, you have to spend what you earn, and invest less in non-productive assets like housing and cars. This happens at a macro level too. It will probably mean the end of the housing bubble in the U.S. and a slow shift of investment into productive assets like industrial equipment and education that will allow the U.S. to produce tradable goods in the future in order to pay off some of its debts. If it doesn't, it will mean a large negative real adjustment in U.S. consumption -- recession.
So, is the Bush Administration for bashing China or against it? Brad SetzerToday, depending on how you want to look at it, the Bush Administration either upped the heat on China by signaling that it will declare China a manipulator the next time, or wimped out. Setting the clock ticking might buy the Administration the ability to push the Congressional vote on Schumer-Graham off until after October. But splitting the difference also risks pleasing no one.
On one hand, it is pretty clear that China's commitment to its current peg is "preventing effective balance of payments adjustment" -- the key technical criteria for currency manipulation.
On the other hand, it is not entirely obvious the US really wants "effective balance of payments adjustment." Debtor countries usually quite like getting the financing needed to keep running up their debts. Apart from the manufacturing sector, most of the US seems to quite like not paying enough taxes to finance the current level of government spending, cheap imports that keep down inflation and low interest rates that push up housing prices. Real adjustment means shifting resources out of real estate and into the production of tradable goods and services. Right now, not adjusting seems a lot more fun.