Okay, so China's currency is clearly undervalued-- what's anyone gonna do about it?

Posted by scapozzola on 05/14/2012

Okay, some big numbers:

Why is this happening? 

Because the U.S. is importing far more from China than it is exporting, resulting in a bilateral trade deficit that dwarfs any trade gap the U.S. has with other industrialized nations.

How has China built such a massive export machine? 

In part by deliberately undervaluing its currency.

IS CHINA REALLY UNDERVALUING ITS CURRENCY?

Don't take our word for it.  According to the Wall Street Journal, 28 of 41 economists surveyed believe that China's currency, the yuan, is undervalued.  Estimates for this undervaluation vary, but apparently 23 of those economists estimate that it is undervalued by more than 5%, which provides a major advantage for China's exporters:

Allen Sinai of Decision Economics estimates the currency is undervalued by up to 30%. And Julia Coronado of BNP Paribas say that if the exchange rate is balanced, China’s currency policy makes no sense. “If it weren’t [undervalued by more than 5%] then what would be the harm in letting it float?,” she said.

Thankfully, most of the U.S. Congress would agree.  Last fall, the Senate passed a bill to penalize countries that unfairly manipulate their currency.  And currently, a majority of the House has co-sponsored a similar bill, H.R.639, "The Currency Reform for Fair Trade Act," including 64 House Republican cosponsors.  

Unfortunately, House Speaker John Boehner has refused to let H.R.639 to come to the floor for a vote. 

Boehner's obstruction on the bill is extremely perplexing, and one has to wonder if the Speaker and others in the GOP leadership are aware of Presidential candidate Mitt Romney's bold campaign pledge to designate China as a currency manipulator on day one of his presidency?

Romney's stern challenge to China is welcoming news to U.S. manufacturers, though.  And it's also wisely timed, since President Obama and Treasury Secretary Tim Geithner have avoided citing China as a currency manipulator, despite an Obama campaign promise to do so.

BOTTOM LINE: China is the $295 billion question.  But will anyone do ANYTHING about it?

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