The Other Shoe Drops (sort of) on the 人民币

By James Fallows

(For those following at home, 人民币 = ren min bi = "people's money" = Chinese currency.)

Today the Treasury Secretary, Timothy Geithner, once again postponed a determination of whether the Chinese government was practicing "currency manipulation." Reports on this topic are due each April 15 and October 15; this is essentially the same thing he did the last time around.

For reasons laid out yesterday, I think this makes sense. Update notes:

1) Geithner's brief statement makes clear that the goal is to keep the RMB moving (without an exact target), and that in the past few weeks the Chinese government has been doing just that:

>>Since June 19, 2010, when China announced it would ... allow the exchange rate to move higher in response to market forces, the Chinese currency has appreciated by roughly 3 percent against the U.S. dollar. Since September 2, 2010, the pace of appreciation has accelerated to a rate of more than 1 percent per month. If sustained over time, this would help correct what the IMF has concluded is a significantly undervalued currency.<<

2) Today the U.S. government also said it would further investigate a complaint, initiated by the United Steelworkers union, about Chinese government subsidies for a variety of "clean energy" projects -- toward an end of taking this complaint, and others, to the World Trade Organization. Again: by the standards mentioned yesterday, good call. Using some of the broad range of U.S. leverage; recognizing (as governments everywhere have) the extent of Chinese government intervention in these industries; and -- crucially -- preparing to take it for international jurisdiction rather than making it a head-to-head US-Chinese issue.

3) Many, many notes from Chinese readers, and some from Americans too, have included an assertion like this one (from a person with a Chinese name): "If I'm not mistaken, the goal of forcing the value of RMB up is to increase the american export [to China]."

Let me put this tactfully: NO NO NO NO NO NO NO. As I've tried to argue over the years - for instance here, here, here -- this isn't the problem, and for that problem (American exports and jobs) whatever the RMB does will not necessarily be the solution.

The problem for the world's economies is chronic imbalance: too much production, reliance on exports, over-investment (yes, it's possible) and under-consumption in some countries, mostly China; and too much consumption, reliance on debt and imports, and over-consumption, in some other countries, mostly the US. You can't and don't balance those accounts on a purely bilateral basis -- mandating that America sell more to China, and China less to the US. That's like thinking you lose weight by just concentrating on what you have for lunch. You balance them by ensuring, overall, that China's economy comes into a less distorted relationship with the rest of the world's -- and America's, from its opposite type of distortion, does too.

In the short run, a rise in the RMB might actually worsen the US-China bilateral imbalance, because China's the only place on Earth where certain products are now made, and a stronger RMB means they'll be more expensive. Nonetheless, it's worth pursuing, because excessive Chinese exports make it harder for the whole world economy to rebound. (And it will take a very long push, for reasons explained here.) It will also take a very long push to improve the fundamentals of American exports, income distribution, and job creation, but that really is separate from the RMB. Bringing China's economy into better balance with the world's -- and doing the same with America's -- makes it easier to solve America's job problems, but it's just a start.

4) I mentioned yesterday that in July and August, the Chinese authorities seemed to be backsliding -- letting the RMB fall again against the dollar, before resuming a rise in early September. Several readers have pointed out an extenuating factor: the Euro was falling against the dollar at that same time, so measured against the whole world trading system, the RMB wasn't falling that much. (China has more total trade with Europe than with the U.S.) Noted.

Even more soon!

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