China's Currency Today

When it comes to China's currency, and their supposed manipulation of it, you've got to keep on top of changing mid-term circumstances and policies. That is to say, what was true a couple years ago may not be true today.

In a past post, which I assigned to several iterations of IPE students, I focused on research from around 2014 that was itself largely focused on the 2012 political debate about Chinese currency manipulation. To my mind, the most interesting factoid there was Gagnon's finding that, while China had been manipulating the value of the RMB after moving to a crawling peg, the large purchases of T-bills that kept the value of the Yuan down had largely stopped in 2011. In other words, by the time Mit Romney was complaining about China's manipulation, the Chinese had already changed their behavior.

Unfortunately, the political debate has not caught up to that reality in the past four years, even while the reality has been changing even further. Indeed, David Goldman invoke Alice in Wonderland imagery in describing the political rhetoric in his column "Alice in Trumperland and China’s currency." (Note: if you are one of my IPE students, you really need to read this article in its entirety.)

Where Gagnon had to dig down into the data on monthly purchases of T-bills to discover China's change in behavior in 2011, Goldman needs only to look at broader measures to see the situation in 2016. Goldman notes the following:

1. The RMB's real effective exchange rate has gone up 40% since 2008. (Note: This is not the Yuan/Dollar rate but the rather the rate of exchange between the Yuan and a basket of currencies.)
2. Since 2008, the annual growth in US imports from China has dropped dramatically since 2008.
3. The trade weighted value of the Dollar has risen over 25% since 2014 while the Yaun/Dollar rate has fallen slightly. This is what dragged the value of the RMB up so much against the other currencies in the world.
4. Chinese refusal to let the RMB fall (more) vs the  Dollar correlated with later drops in Chinese exports. China also had to maintain high domestic interest rates to keep up with the Dollar's rise.

The point here is that if you look at the RMB/Dollar exchange rate, you won't see much movement in the past few years. However, this ignores the fact that the world is bigger than the US and China. To see a little more about what is going on in the world, the graph below shows the trade weighted dollar index from 2000-2016. This shows how the dollar was doing against the major currencies of the world. As you can see below, the Dollar was declining in value from 2002-2008, fluctuated in and after the Great Recession, and then stayed more or less from 2012-2014. Then, BAM!, it shot up in 2014-2016.

Note that from 2002-2008, the Dollar was generally declining in value and, therefore, pegging the RMB to the Dollar meant riding down with the US exchange rate. This meant that the Dollar was not devaluing against the RMB as much as it was against other currencies while at the same time essentially devaluing the RMB against those currencies

However, thing look very different since 2014. The Dollar has shot up in value in the past few years and the Chinese have, apparently to their detriment, not only gone along for the ride, but worked at keeping up. These efforts may be deemed "currency manipulation" but it has been manipulation that has prevented a devaluing of the RMB versus the Dollar (in other words, the opposite of what they would do to maximize exports to the US).

Indeed, if the RMB was fully floating, it would probably have dropped in value versus the Dollar as the latter jumped up in value in 2014. For this reason, one might claim the the RMB is currently overvalued. Again, this is the opposite of what US critics of China claim.

Postscript: Goldman's column alluded to Donald Trump in the title, but the body focused on a talk radio host attacking Cruz. However, Trump does make the standard currency manipulation charges against China in this Op-Ed from November 2015 (reprinted this April). What strikes me when I read it is that the language might be straight out of something written in 2012, including the vague reference to economists estimating that the Yuan is undervalued 15-40%. This runs counter to the tenor of most current commentary about the government trying to prop up the RMB.

  Interestingly enough, the top result Google news search for "China Currency" turns an article in Barron's entitled "Sorry, Trump, but Chinese Currency Is Actually Way Overvalued", with a subtitle of "Amid other bizarre episodes, allegations of China’s cheapening of its currency remain contrary to facts."  (Note: This article largely relies on Goldman's column for its content.)