Tuesday, October 27, 2009

Defending China

Some random thoughts about the exchange rate hysteria gripping our country's punditry:

How can China's exchange rate peg be "currency manipulation"? Of course literally it is, as is any peg, because you have to undertake policies to keep your currency at the target value. People, this is exactly how the Bretton Woods system worked for the entire Western world and it is how the Gold Standard worked as well.

Is that what we want to mean by "manipulation"?

China is not out there devaluing their currency. They are just pegged to us and we do the devaluing for them (with respect to the rest of the world).

Many US economists are pleased that we have a lower dollar to promote exports. Why is that not OK for China too? Yes I understand that we are a deficit country and China is surplus country, but I would be way more concerned about getting China to open its markets to a much greater extent than I would be about the nominal exchange rate between the US and China.

As alluded to above, the Chinese peg fixes the nominal exchange rate, but the key price for trade is the real exchange rate, which is not under Chinese control. 

I have not seen any analyses of the bilateral RER between China and the US, but I think Chinese inflation is higher than US inflation so that under the recent peg, there have been RER movements actually making the Chinese currency less competitive.

All this fussin' and feudin' isn't good for the international trading system. We slap anti-dumping on Chinese tires, they react against US nylon, other countries take note and get into the act (I think India has like 30 anti-dumping cases against China), and the whole system suffers.

The Chinese peg to the dollar is not cause of all our problems, nor is the floating Yuan the solution to our problems.

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