National Security Network

China’s Currency in Context

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Report 4 October 2011

China China

Last night the Senate voted to bring to the floor a blunt, last-ditch measure aimed at pressuring China to revalue its currency, which has been rising but only at a painfully slow rate. While a faster appreciation is in the interest of both the U.S. and China - the issue is not zero-sum - many countries acting together would have been preferable to the U.S. pressuring China alone.   In addition, the economic relationship between the two countries is complex - we will have to address several trade disagreements, and strengthen the foundations of our own economy, to redress the current imbalance with China. More broadly, a serious China strategy encompasses issues from security and economics to human rights and energy. Our economic and security interests, and our values, demand that U.S. policymakers firmly and continually press American interests -- and that no one issue should be allowed to crater the whole relationship. Both sides should adhere to that principle.

Experts agree that the Senate's China currency bill is a blunt, last-ditch measure designed to achieve a sound policy objective: curbing the manipulation of the renminbi. As former Reagan and Clinton administration trade official Clyde Prestowitz writes, "[I]t is in lieu of any other action that the U.S. congress is moving ahead with the only tool at its disposal - legislation. The Congress knows that legislation is a blunt instrument and is hoping against hope that the mere calling of a vote or the mere likelihood of passage will spur the White House and other bodies or leaders to begin to use their scalpels before the Congress wields its meat axe." As C. Fred Bergsten, former assistant Treasury secretary and current director of the Peterson Institute for International Economics writes, employing a more multilateral approach would be preferable: "The artificially low value of the renminbi - it is 20 to 30 percent less than what it should be - amounts to a subsidy on Chinese exports and a tariff on imports from the United States and other countries. The United States should take China to the World Trade Organization in Geneva for engaging in illegal competitive currency devaluation, and retaliate if China does not cease this protectionist policy." In addition, action through already-established legislation could be taken if the Treasury Department decided to label China a currency manipulator, a step that so far has not been taken. [Clyde Prestowitz, 9/30/11. C. Fred Bergsten, 9/28/11]

The bill aims to help correct global trade imbalances, which is good for Americans, as well as the Chinese. Few dispute the idea that China's currency manipulation hurts Americans. As the Washington Post notes, "Economists say that even though China has gradually let the value of its currency rise over the past six years, the Chinese yuan is still undervalued by anywhere from 15 percent to 38.5 percent. They say that is costing the U.S. economy anywhere from a half-million to 2.25 million jobs." But currency manipulation hurts the Chinese as well. As Senior Fellow Nina Hachigian and Economist Adam Hersh of the Center for American Progress explained just before the May U.S.-China Strategic and Economic Dialogue, correcting currency imbalances is also in the broad Chinese interest: "Though the S&ED will raise many thorny issues in the U.S.-China relationship, very few involve a head-to-head, zero-sum competition. Surprisingly, that goes even for currency. China knows that more rapid appreciation of the renminbi would serve to calm its socially contentious inflation pressures, financially destabilizing real estate and investment bubbles, and the economic pains of China's highly unequal path to economic growth. And yet, caution about the pace of change, combined with pressure from an influential constituency-exporters-make China frustratingly slow on this issue." [Washington Post, 10/3/11. Nina Hachigian and Adam Hersh, 5/6/11]

Currency alone won't solve economic issues with China. China's currency manipulation is part of a broader discussion over U.S.-China economic ties:

Intellectual property. New York Times Washington Bureau Chief David Leonhardt writes, "For the United States, the No. 1 problem with China's economy is probably intellectual property theft. Technology companies, for example, continue to notice Chinese government agencies downloading software updates for programs they have never bought, at least not legally. No wonder China has become the world's second-largest market for computer hardware sales - but is only the eighth-largest for software sales." [David Leonhardt, 1/11/11]

Blocking the Chinese domestic market. Leonhardt continues, "Next on the list, say people who work in China or do business there, is the myriad protectionist barriers China has put up. These barriers make this country's recent efforts at ‘buy American' protectionism look minor league. In some cases, Beijing has insisted that products sold in China must not only be made there but be conceived and designed there. The policy goes by the name ‘indigenous innovation.'" [David Leonhardt, 1/11/11]

America's debt and the dollar's position as the world's reserve currency. Brookings Institution Senior Fellow Eswar Prasad writes, "A second issue raised by China's currency and trade policies is the persistent trade surplus since 2004 which has contributed about three-quarters of the nearly US$3 trillion increase in China's foreign exchange reserves over the past eight years. Close to two-thirds of these reserves are invested in U.S. treasury debt... China is not in any practical sense ‘America's banker;' it is more a depositor than a lender, and its economic leverage over the United States is very modest. And while China's leading position in global trade makes it quite sensible to increase the use of the RMB for invoicing and settling trade, it is a huge leap from making the RMB more internationally traded to making it an attractive reserve currency. China does not now meet the basic conditions required for the issuer of a major reserve currency, and may never meet them. Most importantly, the RMB is unlikely to become more than a second-tier reserve currency so long as Chinese leaders cling to their deep reluctance to allow foreigners a significant role in China's domestic financial markets." [Eswar Prasad, 9/7/11]

What We're Reading

Afghan President Hamid Karzai escalated his criticism of Pakistan, charging that the country is not a sincere partner for peace and is essentially using the Taliban to fight a proxy war in his country.

Pakistani military units fired shots at American and Afghan government troops along the Afghanistan border several times over the past year, in encounters the United States has downplayed but that illustrate the fraying relations between the countries, according to officials.

U.S. Defense Secretary Leon Panetta met with Israeli Defense Minister Ehud Barak for the second time in two weeks, emphasizing that America is standing by Israel, but an uncoordinated Israeli strike on Iran could spark a regional war.

Libya's interim prime minister said he would leave his post once Moammar Gadhafi's hometown is captured as the National Transitional Council reappointed most of its top figures.

Activists say at least four people have been killed in clashes between Syrian troops and army defectors in the country's northwest.

Somalia's al Qaeda-linked rebels struck at the heart of the capital Mogadishu, killing at least 65 people with a truck bomb in the group's most deadly single attack since launching an insurgency in 2007.

Piracy is costing the global shipping trade more than $9 billion a year, according to Indian ship owners, who demanded that the UN set up a maritime force to halt pirates operating off the Somalian coast.

Nigeria's government says Islamic militants in northern states are linked to al-Qaida-affiliated terrorists in the Sahel and in Somalia.

Prime Minister Vladimir Putin proposed forming a "Eurasian Union" of former Soviet nations, saying the bloc could become a major global player competing for influence with the United States, the European Union and Asia.

There is no sign that China cut off or reduced any military-to-military relations in retaliation for a recent U.S. arms deal with Taiwan, according to a Pentagon official.

Commentary of the Day

Colonel Lawrence Wilkerson explains that the swiftness with which federal law enforcement officials have been able to bring Umar Farouk Abdulmutallab to trial is the latest powerful argument against overreliance on the military to combat terrorism. Unfortunately, too many in Congress are not listening.

John Podesta and Caroline Wadhams write that the assassination of former Afghan president Burhanuddin Rabbani and the recent attacks should show U.S. policymakers that they must take a stronger role in facilitating a lasting political settlement in Afghanistan among Afghans and with Pakistanis, rather than getting caught in a cycle of retribution against insurgents and Pakistan.

Tyson Barker examines German chancellor Angela Merkel and how she emerged victorious from perhaps the most trying moment of her political career.

Meghan O'Sullivan reports that Qatar is positioning itself to be a major player in future Middle East Policy.