When we were asking, there was a presumption that the market would push the RMB ever upwards. The call for adherence to market forces was also supposed to address concerns of fairness. exports and lessen competition from Chinese imports. Some advocates thought such an approach would boost demand for U.S. I have detailed the various possibilities elsewhere, but what China is doing this week is pretty close to what the Bush and Obama administrations have asked it to do for years - move towards a market-determined exchange rate. That does not mean that Beijing will take dictation on the matter, but it gives us a reference point: if China’s actual practices deviate from our ideal, we may have cause for complaint. More seriously, for over a decade the challenge for the United States has been to decide what kind of currency regime we want China to have. I now recognize the temptation that all journalists must feel these days - go with a colorful Trump quote! I, too, succumb: Donald Trump said on Tuesday that China’s move would be “devastating” for the United States.Įnough of that. In this case, the IMF offered a cautious blessing, saying China’s new approach was “a welcome step as it should allow market forces to have a greater role in determining the exchange rate.” Like everyone else, though, the IMF is waiting to see how this plays out in practice. Given the potentially subjective element of determining which actions are permissible in currency markets and which imbalances exceed normal levels, one common approach is to turn to the International Monetary Fund for a more independent assessment. In support of that claim, when China intervened on Wednesday, it was to stop the RMB from falling further (it was buying RMB to try to make the currency stronger).
#Let slip the frogs of war free
It was not moving to a free float, but would allow its reference rate on the currency to move to reflect market pressures. That would seem to support an argument that the market was pressing for a weaker RMB.Ĭhina claimed that it was cutting back on its intervention and allowing the market to do what it would. China met that extra demand by depleting its stock of dollars. That would indicate that there were more people in the market trying to turn RMB into dollars than the other way around (at the given exchange rate). While China had previously accumulated a mountain of foreign exchange reserves, its roughly $3.7 trillion stockpile had decreased by $150 billion in the first half of 2015. On the other criteria, though, the context seems more exculpatory for China. That’s within the bounds of what is generally considered normal (no serious economist thinks that every country should have perfectly balanced trade every year). Was the country running a trade surplus? Did it accumulate foreign exchange reserves? Did it intervene to weaken its currency to make its exports appear cheaper? All might be damning indicators.Ĭhina is running a trade surplus of some 2 percent of GDP, versus 10 percent of GDP in 2008. Usually, advocates for stronger action against currency manipulation include some context that considers motive. It would indict any currency approach other than a pure float, which is when private buyers and sellers alone determine a currency’s value. That’s really too simple a definition, though. Setting aside legal definitions and focusing on economic substance, one simple definition might be that a country manipulates its currency when it intervenes in foreign exchange markets. To attempt an answer, though, we need some clarity on what “currency manipulation” means. There were certainly accusations of currency manipulation in the wake of China’s move. Was this move Chinese currency manipulation? With that caution, here are five questions and some tentative answers about what it all means: Assessments shift with each day’s observation of China’s central bank (a sample size of two). Then, this week, it dropped, falling 1.9 percent against the dollar on Tuesday, and another 1.6 percent on Wednesday.Īctive debates are raging among economists and China watchers about what it all means. For years, when measured against the dollar, the RMB had generally either strengthened or held steady. This week, the People’s Republic of China let slip the renminbi (RMB).
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