So Much For Promises: China’s Manipulating Its Currency, Again

By Matthew McMullan
Jul 17 2014

How long ago was the Strategic and Economic Dialogue?

Weeks? No, not weeks. It would need to be at least two weeks to be weeks, plural. And it’s only been, like, eight days since U.S. Treasury Secretary Jack Lew and Secretary of State John Kerry returned from America’s annual bilateral meetings with Chinese government officials.

There was a lot to talk about –- China is beefing with American allies over territorial disputes at sea, and its military officers have been identified as suspects in industrial espionage against U.S. targets.  But underlying the talks, as usual, was the topic of China’s weighted currency. By gobbling up U.S. treasuries, China can pump up the value of the U.S. dollar and slash the value of its currency (the yuan), essentially taxing American exports while subsidizing its own. And it works. America's trade deficit with China was $318 billion last year alone.

So, would China agree to let the yuan’s value rise to a market-oriented exchange rate?

"I could not be more clear with our Chinese counterparts on the need for them to step back from intervention and for them to move toward a market-determined exchange and to be much more transparent about their actions," said Lew just yesterday to a business conference. No word on whether any guffaws were elicited. Lew had returned from him trip to Beijing with no guarantees on the subject, but with promises of "more transparency." The Chinese government, the secretary reported, would be letting Washington know its thinking when it came to foreign-exchange operations.

But that turned out to be a lot of noise. From the Wall Street Journal:

The Chinese government has increased its buying of U.S. Treasurys this year at the fastest pace since records began more than three decades ago, data released Wednesday show. The purchases help explain Treasurys' unexpectedly strong rally this year. The yield on the 10-year U.S. Treasury note has fallen to 2.54%, from 3% at the end of 2013. Yields fall as prices rise. The world's most-populous nation boosted its official holdings of Treasury debt maturing in more than a year by $107.21 billion in the first five months of 2014, according to the U.S. government data. The buying has been fueled by China's efforts to lift its export-driven economy by weakening its currency, the yuan, against the dollar, market analysts said, a strategy that encompasses hefty purchases of U.S. assets.

So much for promises and good intentions! Treasury’s strategy of gentle admonishments and occasional finger-wagging has resulted in bupkes. Might it be time for Congress to again take the lead on this issue?

It’s worked before. Even the threat of congressional action on currency has made the yuan move in the right direction. And though it's been a while since we've told you, a majority of this very Congress has said it wants a currency manipulation rule in the incomplete Trans-Pacific Partnership trade deal. I'd bet they'd agree that flagrant currency manipulation by America's chief trading partner and the world's second largest economy isn't very cool, either.