Gentle admonishments won't do much to stop currency manipulation

Posted by mmcmullan on 05/13/2014

Another day, another expensive dollar: U.S. Treasury Secretary Jack Lew met with his Chinese counterpart today and pressed him on the undervalued exchange rate of China’s currency.

'It is important that China demonstrate a renewed commitment to move to a more market-determined exchange rate,' Treasury Secretary Jacob Lew told China's top economic official, Premier Li Keqiang, in a meeting.

It is important! But why is this a big deal? Well: The New York Times reports that the yuan has fallen in value by 3 percent this year:

Analysts say China’s central bank is intervening in the currency markets to engineer a slide in the value of the currency. That would punish speculators and prevent big capital flows from the entering the country.

It also drives the price of China’s exports down by making the dollar more expensive in comparison. By weakening its currency, the Chinese authorities not only siphon off capital flows and crack down on speculators, they create an uneven playing field that adversely impacts American manufacturers. And doing so has cost a lot of manufacturing jobs here in the past.

The Treasury Department that Jack Lew oversees had a chance recently to name China a currency manipulator and initiate negotiations to end the practice. But the Treasury Department declined. Instead, Lew (and by association, the Obama Administration) opted for the gentle admonishment that he delivered today.

That’s puzzling, because even the suggestion of serious action on currency manipulation in the past has caused China’s currency to move toward a “market-determined exchange rate."

A Senate procedural vote in 2005 that marked the first step toward addressing Beijing's currency manipulation provoked an immediate rise in the yuan. When then-Treasury Secretary Timothy Geithner threatened action ahead of a G-20 meeting in 2010, the yuan rose. It rose again during House and Senate votes on currency legislation in 2010 and 2011. And when President Barack Obama and GOP challenger Mitt Romney promised to get tough on the Chinese government's trade practices during the 2012 campaign, guess what happened? The yuan moved.

Funny how that works. Meanwhile, the rate of the yuan's appreciation was actually faster during the Bush administration than it has been during President Obama's time in the White House. This recent backsliding won't help that disparity.

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