U.S. Unwilling To Brand China

The US Treasury department makes two annual assessments of the relative value of the Chinese currency, the Yuan, against the US Dollar. America has long suggested that the Chinese manipulate the value of their currency to give their exports an advantage in bilateral trade with the US and other nations which settle trades using the US currency. China routinely claims that this is not the case.

The most recent Treasury report falls short of declaring the Chinese authorities to be currency manipulators, but does state that the Yuan remains “significantly under-valued” and went on to urge China to make further progress in allowing it to appreciate against the Dollar and other major international currencies. The report notes that: "The Chinese authorities have substantially reduced the level of official intervention in exchange markets since the third quarter of 2011, and China has taken a series of steps to liberalise controls on capital movements, as part of a broader plan to move to a more flexible exchange rate regime”.

In 2005, China embarked on a curreny management policy whereby the Yuan is fixed against a basket of foreign currencies – so it could hardly be said that its value is fixed by market forces: it is clearly “managed” by the state – manipulated is such an ugly word. This strategy has seen it appreciate by 9.3% against the Greenback, but over the same period, the Yen has appreciated by 11.3% (including the current rally). Given that the performance of the Chinese economy over this period (in terms of GDP growth) has been vastly superior to both those of Japan and America, economic factors dictate that the Yuan should have strengthened significantly against both currencies.

The question of currency manipulation is not one of simple economics since were the US to brand the Chinese as currency manipulators, the move would precipitate trade sanctions which would not be a welcome development given the feeble state of global demand.