Pressing the Chinese on Currency Valuation, Effectively

By January 23, 2009Economy, Policy Experts, Trade

It was important for Treasury Secretary-designate to flatly state that China is manipulating its currency. Everyone knows China’s currency is being held at an artificially low level, and it is necessary for the United States Government to acknowledge this in order to be able to approach the problem realistically. (See New York Times and WSJ stories.)

The next step is more difficult – how to get China’s currency appreciating again. The currency appreciated 21 percent against the dollar through July 2008 and then went flat as Chinese authorities decided they were concerned about China’s slipping export performance in the slowing world economy. The fact of the matter is that China’s continued currency manipulation is hurting their own economy and making their transition away from export-led growth more difficult. Yuan appreciation can be win-win.

The Treasury Secretary-Designate is properly concerned with China’s currency and as the next step needs to work within established international means to find a solution. During the campaign, then-candidate Obama saw the importance of a change in China’s currency practices and said he would use all the diplomatic avenues available to seek such a change. Certainly the International Monetary Fund can play a stronger role than it has in the past.

Geithner’s statements showed he wants to get China’s currency moving, but without precipitating a new global financial crisis. Global financial stability and further appreciation of China’s currency can and should go hand in hand, but all this needs to be done carefully and in a way calculated to achieve both objectives and contribute to a lessening of global imbalances.

The yuan per dollar graph below shows how China’s currency was moving until July 2008, and then was held flat.




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