Washington and Beijing’s new yuan policy
What does China’s new currency policy mean in terms of efforts in Congress to pass an anti-China currency bill? Here is some of what some smart people told me. First Gary Hufbauer of the Peterson Institute for International Economics:
1. The Chinese decision ratifies the forecast I made a while back — announcement of “flexibility” prior to G20 confabs.
2. This will take the heat off Geithner and put the Schumer bill on the back burner. Schumer and Geithner can both claim victory.
3. Going forward, my expectation is that “flexibility” will translate into RMB apprecition against the dollar of around 0.5% per month, for a cumulative appreciation not more than 15% over the next two years.
4. As the euro weakens against the dollar, China will claim (rightly) that its real effective XR is also appreciating, and that takes some of the edge off of pressure to appreciate the RMB against the dollar.
5. My guess is that other Asian countries will appreciate against the dollar as well, but less than China.
Next up is the Philip Levy of the American Enterprise Institute:
1. To me, the puzzle is why they did not do this back in February. The move relieves a great deal of the pressure on the Chiense to revalue and they incur minimal costs in terms of export sector pressure. The only position that really united the bulk of Western critics was that Chinese stasis on currency was unacceptable. As soon as this becomes a debate over the appropriate rate of appreciation, the critics will split.
2. There will certainly be continued criticism. It is highly unlikely that China will appreciate much faster than the 6 percent annual rate they followed from 2005-2008. That’s not going to deliver the millions of jobs that Fred Bergsten, Paul Krugman, and the Economic Policy Institute have been promising. Those critics were talking about a 25-40 percent appreciation all taking place while the United States is in a liquidity trap. I never bought their premise, but if you did, time was of the essence.
3. I doubt Sen. Schumer or Chairman Levin will be satisfied with a steady but minimal rate of yuan appreciation, but it should certainly reduce pressure on Secretary Geithner to name China a currency manipulator.
4. And, of course, it will be interesting to see whether the Obama administration will take a firm stand. If they threatened a veto, it would be the first time they’d blocked a measure because of anti-trade content within (going back to Buy America and Mexican trucks). My understanding was that Schumer had hoped to attach the provision to must-pass legislation anyways. I would be thrilled to see the Obama administration take such a firm stand, but surprised as well.
Me: Beijing’s currency concession might temporarily defuse Capitol Hill critics who want to limit imports. But it won’t dispel them. With American unemployment high and congressional elections just months away, China is just too convenient an economic scapegoat. Only if PetroChina oil was fouling the Gulf of Mexico right now could China be a more tempting political target. Trade relations are sure to remain contentious.