March 26, 2010
-- by Dave Johnson
Even Chinese government officials are making the case for a stronger currency. In a must-read NY Times story, China Officials Wrestle Publicly Over Currency,
The current drama began on March 6 when the governor of China’s central bank stunned analysts by saying that the bank’s policy of keeping the renminbi at a constant exchange rate against the dollar was a “special” response to the global financial crisis.
The new description suggested to many economists that the current value of the renminbi was temporary and that the central banker, Zhou Xiaochuan, was preparing the Chinese public for a stronger renminbi.
Why is all of this discussion about Chinese currency coming to a head now?
The debate is far from academic. In the coming weeks, the Obama administration faces a series of politically charged deadlines set by Congress to decide whether to continue negotiating with China over currency and trade issues or to take a more confrontational stance and name China a currency manipulator.
If the administration labels China a currency manipulator, it would face further Congressional pressure to impose punitive tariffs on many Chinese goods.
Please read the entire NY Time story for its explanation of some of China's internal tensions over the currency-rate problem. The Commerce Ministry is close to exporters who have been enjoying this manipulated advantage, and fights for their interests. The central bank has accumulated a vast store of foreign currency and would be blamed for the value drop of this pile of foreign cash as their own currency gets stronger. But the pile also means that the central bank cannot easily raise interest rates to fight rising inflation. Because of this inflation companies are starting to import and stockpile commodities. Etc. It's a tense mess with the highest of stakes. (Yes, I feel the excitement of a thriller when I read about economics. My wife rolls her eyes.)
The Chinese government is trying to just manage all of these market forces instead of letting them operate as markets. The resulting imbalances are causing tremendous pressures - and bubbles - to build up both inside and outside of China. If China won't resolve this as the danger to the world's economy grows, the rest of the world must step in. On April 15 President Obama has an opportunity to start restoring balance to the world's economy by declaring China a currency manipulator and taking steps designed to force them into balance with the rest of the world. Think of it as an intervention for their own good.
Posted by Dave Johnson at March 26, 2010 8:09 AM
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