U.S. yuan raid idea is fascinating but flawed

By Wei Gu
September 21, 2010

A top think tank has advised Washington to declare a currency war on China. The proposal from the Peterson Institute to force up the value of the yuan sounds fascinating, but a direct attack may be hard to pull off in practice. Beijing is likely to respond better to multi-lateral persuasion.

Peterson has called for a U.S. raid on the forwards market for the yuan, which it believes has to rise at least 25 percent against the dollar. The timing is good. U.S. lawmakers are already threatening to slap tariffs on Chinese imports, and the 1.5 percent rise of the yuan in the past two weeks hardly looks enough.

Targeting China’s currency directly goes to the heart of the problem, whereas duties only address exports from China on a product by product basis. Foreign traders can’t buy yuan in large quantities because of China’s strict capital controls, so the next best thing is “non-deliverable” forwards.

These forwards, where no yuan actually change hands, don’t directly impact the exchange rate. But a big rise in their value could give China a headache. If forwards seemed to price in strong appreciation, it could attract speculative inflows and make China’s asset bubbles worse.

While this idea is fascinating, the execution would be tricky. The size of the forwards market is just $1 billion on a volatile day. The United States could not intervene in such a small market without being noticed. That would risk inviting counter-trades by arbitrageurs, who might sell forwards even as the United States buys.

Beijing might also inflict losses on would-be raiders. If it resolutely fixed the yuan below the forward price, the trader would make a loss. Washington may thus struggle to find investors willing to do its bidding. Unlike Beijing, it doesn’t control its financial institutions, so can’t tell them to carry out unrewarding trades.

The biggest problem with Peterson’s idea, though, is that Washington can’t really justify manipulating the yuan when it is blaming Beijing for the same thing. Two wrongs don’t make a right. Transparent, multi-lateral pressure looks a better way to call for change.


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Top think tank? Excuse me?

Looks like kindergarten to me.

These Peterson guys must be playing too many video games.

We live in a real world. Wake up guys.

Maybe think tanks are just that; keep thinking while the real world passes you by.

Posted by doctorjay317 | Report as abusive

how about just a regular war with soldiers, tanks and planes?

Posted by murfster | Report as abusive

The USA is under attack from undervalued currencies. Another way of saying the same thing is that the dollar is overvalued. The USA can unilaterally solve this problem by offering to buy an unlimited amount of yuan at a fixed ratio, say of 4 yuan for 1 dollar. Unlimited. It is called currency devaluation and we really have no choice.

China will not negotiate. They are determined to make 98% of Americans unemployed. They do not care. Why does our own government not seem to care as well?

Posted by txgadfly | Report as abusive

Let’s try something that is Fail-Proof and very, very easy:
Have the US govt. take our US Dollars and start buying up foreign stocks, mines, oil, strategic minerals, gold and silver. When the dollar eventually does collapse the rest of the world (like China)is left holding worthless US$ and we have all the hard assets.

Just what is so hard to understand about this?….Quit messing around in the forex and derivitives markets.

How long do you think it would take China to realize what was happening and revalue their yuan before it was too late?

Posted by hunt | Report as abusive

All this talk about the Yuan-Dollar exchange rate being manipulated by the Chinese government, but nobody wants to shine a light on the fact that global trade is conducted in US dollars, which is not pegged to the gold standard and is a fiat currency that the US government can manipulate.

Posted by MonkeyKing | Report as abusive

Level the playing field.

If tariffs are in order to make that happen…then do it. We as Americans need to rebuild manufacturing and build and ship the best quality products, promote jobs, and grow our domestic output. This won’t happen when our companies are placed at disadvantages, whether that is due to currency matters, subsidies, or poor environmental and labor practices. Come on Washington our country is counting on you.

Posted by cdog3186 | Report as abusive

Oh dear. Blame China if you want, but please realise that this is what happens when you let your productive manufacturing go offshore so as to maximise profits.
US companies went for profiteering over sustainable growth, the Fed has been effectively creating currency that is not tied to any economic activity, and “too big to fail” companies are being propped up by a government that is already stretched by two wars that were grossly mismanaged.
Also, the US currency is artificially propped up because it is the only currency to buy oil in. This, in turn is only possible because of US bases and military activity around the world. China will not accept criticism from a nation that has never played fair, yet expects others to! One might pay service to hypocrisy from a “superpower”…but the Bush era put an end to that, so get used to having to “eat your own dogfood”.
the sooner you wake up, the sooner the decline can be stopped.

Posted by OzzAndy | Report as abusive

What does fair have to do with anything?

Our Government, our currency. We can devalue any time we like. Who cares whether “our” (now there is a laugh!) companies lose money when their foreign production costs soar?? They exported the production and made hundreds of billions while unemployment soared here. Time to pay the piper.

Forget tariffs. We would need them on the whole planet. Our problem is that our currency is managed to export jobs and make profits for foreigners. Time for self-rule in the USA!

Posted by txgadfly | Report as abusive

@cdog3186. Excellent comment. As the insatiable beast of government taxation and mindless regulation has driven up the cost of doing any business in our country that is internationally competitive, our economy and very way of life is threatened. The Japanese model of labor, companies and government working together in task forces to identify, target and compete internationally is something the USA has never done. Instead these three components of economic growth have fought each other endlessly in the USA, with the inevitable results.

Posted by cynicalme | Report as abusive