Wandering China

An East/West pulse of China's fourth rise from down under.

U.S.: China not currency manipulator [China Daily/Xinhua]


Despite all the finger pointing currency-manipulation rhethoric by politicians seeking a populist stance to question China’s economic behaviour, the U.S. Treasury department (Office of International Affairs) ‘seems’ to find little evidence of this in their semi-annual report to the Congress on International Economic and Exchange Rate Policies. As this article was published by China Daily/Xinhua I felt prompted to check the validity of this pretty definitive statement, and true enough, here is the evidence. Note that the Board of Governors of the Federal Reserve System and IMF management and staff were consulted in the report.

Here’s an excerpt that sheds some light –

When comparing the relative cost of goods in two countries, changes in the nominal bilateral exchange rate are important but don’t tell the full story.  A more comprehensive measure, the real bilateral exchange rate, takes into account the difference in rates of domestic inflation between the two countries, which also impact the relative prices of their goods.  To take the illustrative example of a train locomotive, suppose that:

1)  The RMB/dollar exchange rate is 6.6, roughly as it is today.

2)  A locomotive costs $2 million in the United States, and that the same locomotive costs RMB13.2 million in China.

Therefore, the prices of the two locomotives are identical in dollar terms. There are 2 different ways that the price of the Chinese locomotive could rise 10 percent in dollar terms, making it more expensive relative to the U.S. locomotive:

1)  Nominal appreciation of the RMB:  The RMB appreciates 10 percent against the dollar, so that the RMB/dollar exchange rate is now 6.  The price of the Chinese locomotive in dollars is now $2.2 million, or 10 percent higher.

2)  Relative Levels of Inflation:  Prices in China rise by 10 percent while prices remain constant in the United States (or, equivalently, prices rise by 10 percentage points more in China than they do in the United States.)  With domestic prices 10 percent higher in China, the domestic price of the locomotive is now RMB14.5 million.  At an RMB/dollar exchange rate of 6.6, the price of the Chinese locomotive in dollars is now $2.2 million, or 10 percent higher.

Please find the full report here – Report to Congress on International Economic and Exchange Rate Policies by U.S. Department of the Treasury Office of International Affairs, published February 2011

– – –

US: China not currency manipulator
(Xinhua)
Source – China Daily, published Feb 05, 2011

WASHINGTON – Major trading partners of the United States, including China, did not manipulate their currencies to gain an unfair advantage in international trade in 2010, according to a report released by the US Treasury Department on Friday.

“Based on the resumption of exchange rate flexibility last June and the acceleration of the pace of real bilateral appreciation over the past few months,” China’s behavior did not qualify under the official definition of manipulation, the Treasury said in its long-delayed semiannual report to the Congress on International Economic and Exchange Rate Policies.

With respect to exchange rate policies, ten economies were reviewed in this report, accounting for nearly three-fourths of US trade. Many of the economies have fully flexible exchange rates. A few have more tightly managed exchanges rates, with varying degrees of management.

“No major trading partners of the United States” met the standards identified by the Congress as currency manipulator, concluded the report.

Since the June 19, 2010 announcement by China’s central bank of greater exchange rate flexibility, its currency, also known as renminbi (RMB) has appreciated 3.7 percent against the dollar, or about 6 percent annualized. The renminbi has appreciated 26 percent in total against the dollar since 2005.

The Treasury said that because inflation in China is significantly higher than it is in the US, the RMB has been appreciating more rapidly against the dollar on a real, inflation- adjusted basis, at a rate which if sustained would amount to more than 10 percent per year.

The US accuses Beijing of keeping its currency undervalued, flooding the country with cheap exports and costing US jobs. But many economists believe that the appreciation of RMB will help little to the US employment.

“Treasury today again made the right call on China’s currency policy in its latest exchange rate report,” John Frisbie, President of the US-China Business Council (USCBC) said in a statement after the US Treasury Department’report.

“While USCBC believes that China should allow its exchange rate to better reflect market forces, designating China as a ‘ manipulator’ would achieve nothing. USCBC continues to support the Obama administration’s approach of combined multilateral and bilateral engagement with China as the most effective way to make progress on the exchange rate issue.”

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Filed under: Beijing Consensus, China Daily, Chinese Model, Domestic Growth, Economics, Finance, International Relations, Politics, Soft Power, U.S.

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