Manipulations

Romney’s Chinese currency manipulation allegations are two years and a hamburger out of date

October 17, 2012
October 17, 2012

CNY/USD exchange rate

At the second presidential debate on Oct. 16, Republican candidate Mitt Romney didn’t mince words: “China has been a currency manipulator for years and years and years,” he said. He promised to push punitive tariffs against Chinese goods to make up for US manufacturing losses due to the yuan’s artificially weak exchange rate against the dollar.

American politicians love bashing China for votes, of course, but currency manipulation isn’t the problem it once was. As the above graph shows, after China ended its decade-long currency peg in 2005, the yuan appreciated fairly steadily. And it has done so again since a second period of pegging (adopted to shield China from the global financial crisis) ended in 2010, though China still keeps the yuan within an exchange-rate band. Market forces have driven up the yuan, though there is speculation that its most recent fillip was an intentional attempt by the Chinese to help Obama get re-elected, though Federal Reserve’s recent policy changes played a role as well.

So is the yuan now “correctly” valued? Probably not; otherwise, why not just let the currency float? But economists think the gap is shrinking. To figure out by how much, one classic (if unscientific) approach is to compare purchasing power in the two countries using the Economist’s Big Mac index, which famously tracks the price of the iconic fast food sandwich in different countries. In July of this year, the index found that Chinese burgers were about 40% cheaper than American burgers, suggesting the country’s currency is undervalued (although the gap had shrunk from previous years).

But the compilers of Big Mac data note that the burger is cheaper in China not just because of a weak yuan but because labor is cheaper there too. To account for this in 2011, the researchers adjusted their data to take into account differences in GDP per person. When they did that, they found that the yuan might be slightly overvalued—in other words, when you consider cheaper labor costs in China, you might be paying too much for that hamburger.

So while the extent of Chinese currency manipulation isn’t clear, what is clear is that it’s declining. Even the most commonly cited method of manipulation, purchasing large quantities of US government debt, has been in retreat: US taxpayers owe China 10% less this year than they did last year, and they hold fewer US notes, with American investors and Japan picking up the slack.

So while the US has plenty of complaints about Chinese trade practices—intellectual property rip-offs, poor working conditions, even subsidy programs that might be illegal under global trade rules—currency manipulation might not be the one to lead with. It’s a problem that’s seems to be going away, and a real scrap about the issue could cause serious trouble for both countries.

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