On the RMB

Last night I complained about Chris Coons's habit, in his televised Delaware "debate" with Christine O'Donnell, of beginning most of his responses with, "there's too much here to respond to." But that is sort of how I feel at the moment about the RMB. Let me make three points and then offer a bonanza of links and excerpts for your spare-time reading.

Tomorrow the Treasury Department will release its findings about whether China's (uncontested, obvious, and indisputable) central-bank efforts to hold down the value of the RMB amount to "currency manipulation." Those findings were originally due six months ago, but the declaration was deferred until now (and can in theory be re-deferred indefinitely). [Update: My mistake. The reports are due each April 15 and October 15. Last April's was deferred to July. The judgment on "manipulation" can be indefinitely deferred.] Here's my guide to the news:

1) What the US wants. Or what it should want, if it fully had its wits about it. What it wants is continued movement in the RMB's value against the dollar. Not a sudden one-time jump in value. (For another time: why "sudden" change is almost never what you want from the Chinese government, in any area.) Not a specified new target exchange rate. Just a demonstration by the Chinese authorities that they understand that the currency's value has to go up, and they're not going to prevent that process -- as they foolishly tried to for a while this summer.

Background: the dollar/RMB rate was essentially frozen, at just over 8 RMB/$1, for many years until late 2005. Then for about the next two and a half years, the Chinese government allowed a "managed float," and the RMB rose against the dollar until it reached a level of about 6.8/$1 in mid-2008. Once the world financial crisis hit and demand for Chinese exports plummeted, to protect its struggling export industries the Chinese government froze the RMB's value once more.

This chart (from Yahoo Finance) gives the idea. The chart shows the value of the dollar -- so a declining line means a stronger RMB. The truncated vertical scale exaggerates the degree of change, but it accurately shows the trend:

After the Obama Administration avoided declaring China a "currency manipulator" this spring, the Chinese government let the RMB start appreciating again. This was assumed to be a pre-greased understanding: as long as the Chinese government wasn't forced to "knuckle under" to foreign pressure, it could start moving in the right direction. Then, after a very short time, the appreciation stopped -- this chart shows the movement over the past year:

What we're seeing here: the essentially frozen exchange rate until June of this year, then the brief strengthening of the RMB's value through June and until early July  -- and then the reverse trend, through much of the summer, of the RMB weakening again against the dollar. Finally, starting about a month ago, the Chinese government let the RMB's value start rising once more.

The US wants the recent trend to continue. We can argue about faster, slower, or the right "eventual" value for the RMB. But as long as its value is rising, the Chinese government is playing ball; and if it ever stops rising, the Chinese government is being deliberately uncooperative. That's what it did for two difficult months this summer -- the stretch on the graph above from early July to early September.

2) What tools and weapons the U.S. has. It might seem that the "big" weapon here is the "currency manipulator" label, but there is little reason to think that would do any good (beyond sounding tough). For one thing, it is guaranteed to strengthen the hand of the "Hell no, we won't bow to the foreigners!" camp within the Chinese government. Worse, it creates the "shot the wad" problem. Having exercised this threat, the U.S. doesn't have a convenient next step to take -- or threat to hold in reserve. Moreover, applying this label to China would open up endless subsequent arguments about when and whether China could ever come off the "manipulator" list.

So the tools are those that -- frustratingly, but this is life -- constitute the entirety of America's relationships with China now and for the future: the whole spectrum of diplomatic, financial, trade, strategic, educational, technical, military, and other contacts between the countries. These can be on a generally-improving track, or a generally-deteriorating one. Neither country has a simple, clear, all-determining lever to use on the other; each has a wide range of influences. The US can and should use everything in the arsenal, rather than the simple "We Think You're a Cheater!" label.

3) The strategic edge for America. In many matters, the U.S. is accustomed to being the big bully everyone else loves to resent. On these currency questions, amazingly enough, it's much closer to "the world, including the US, versus China" than to "everybody else, including China, against the US." China's currency policies are a more acute threat and annoyance for Brazil, Korea, Singapore, India, Japan, some European countries, and others than they are for America. As I've argued before, the Chinese government can be surprisingly clumsy and ineffective in building international support and alliances. We can be those things too -- but in this case, world opinion is more on our side than theirs.

Accordingly, the US should do everything it can to make this a big, multilateral, "nothing personal" issue. It should take cases to the World Trade Organization whenever possible. (The Chinese officials have an easier time accepting a WTO judgment than a "demand" from the United States.) It should use big international forums, like the G20 meetings. It should let other countries take the argumentative lead wherever it can.

So: watch the news tomorrow -- and next week and next month -- for evidence that the US is keeping up pressure on China for steady, consistent appreciation of its currency. But don't expect to see an immediate jump in the RMB's value. And don't hope to see a "manipulator" declaration. That would be a sign of desperation more than of success.

After the jump, a compendium of other reading tips.

1) Paul Krugman has argued hard for tough measures against the Chinese policy. For a tough argument back about the impracticality of such measures, see this.

2) For a clear explanation of the fundamentals in the dispute, see this by Bradley Gardner. It includes a point that cannot be stressed often enough: Americans shouldn't be pushing for a stronger RMB in expectation that this will bring factories from Guangdong back to Ohio. It won't. What it might do is reduce a huge distortion in the world economy. As he says:

>>Put simply, the argument for revaluing the RMB is that an undervalued currency makes it much more difficult for Chinese citizens to consume Western goods, while subsidizing the consumption of Westerners. This has more to do with the need for the Chinese government to buy US debt in order to keep down the exchange rate (by artificially increasing the amount of RMB being sold to buy USD), as opposed to simply price parity....

So to be clear here, we're complaining that China subsidizes our debt too much. Which is fair enough, as its creating an environment that's unsustainable for everyone, but its different from the "evil competitive advantage" argument that's going on.<<

More from Gardner in his post and this other one, and from me in this Atlantic article.

3) Several recent entries from Michael Pettis worth considering: a "modest proposal" for solving the problem, here, which involves Chinese investment in America's crumbling infrastructure; an exploration of the effects in China of revaluation, here; and a (surprisingly) sympathetic-to-Chinese-officialdom explanation of why they've resisted so hard, here.

There is a lot more, but that will do for now.