Hyperinflation led to Hitler and Mao. What will China's currency manipulation lead to?
China's currency manipulation aggravates US politicians, but it could also upend its own economic gains. By keeping the yuan artificially low, China increases inflation to dire levels. Instead of whining about the policy, the US must emphasize this dangerous tradeoff to China.
College Park, Md.
The US Treasury Department’s recent report downgraded the Chinese yuan from simply “undervalued” to “substantially undervalued.” This was predictably met by renewed claims from Senators Charles Schumer (D) of New York and Max Baucus (D) of Montana that China is manipulating its currency, and there is surely much more of that kind of rhetoric on the way from them and others. It’s always politically useful to have a boogeyman ahead of elections, and with the 2012 electoral campaigns apparently underway, China is the undeniable boogeyman du jour.Skip to next paragraph
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But this is no time for indignation, righteous or otherwise. Far more effective would be to emphasize to China that its currency policy presents a challenge that, if unchecked, could well upend its own tremendous economic gains. In other words, China could be shooting itself in the foot.
If imitation is indeed a sincere form of flattery, then China has flattered us mightily with its currency policy. Pegging its currency to the US dollar has worked wonders for its export machine and affirmed early on the importance of the US market. This much has been of mutual benefit. But as we all know, there can be too much of a good thing.
How China keeps the yuan low
As China exports, the sine qua non is that the purchaser of the wares must also purchase Chinese currency. This exchange is usually invisible to the purchasers themselves, but somewhere along the supply chain, someone on the purchaser’s behalf must buy Chinese currency with which to pay the exporter. Done repeatedly, this “demand” for Chinese currency would normally drive the “price” of the Chinese currency upward.
But as we know well from the political rhetoric accompanying President Hu Jintao’s recent visit, China keeps intervening to prevent its currency’s rise in order to maintain its meal ticket at the US lunch counter.
China keeps the value of its currency low by constantly increasing the overall supply of yuan, thereby cheapening the value of each yuan. This is done in precise measure to offset the upward pressure exerted on the yuan by the country’s export success. With its currency now artificially low relative to the dollar, China can continue to export more “cheap” goods to the US market. That’s the meal ticket.