Currency manipulation

An NPR podcast called The Indicator about how China and other countries have historically manipulated currency. (It’s a good, accessible, informative show albeit a little cutesy at times, especially this episode. But short and worth it.)

China purchases a large amount of USD on the market. This glut of supply of yuan coupled with the scarcity of dollars drives up the international exchange rate for dollars and drives down the rate for yuan. This allows China to increase its exports to the U.S. because it’s such a better deal to be able to buy more stuff with a dollar.

Then an economist said that there is a way that the U.S. can respond to this that is so simple that he is surprised we’ve never done it. Just buy up a bunch of yuan to balance off the effect.

First, what would we do with all the yuan? Second, it seems like this would create a never-ending currency war that would result in each currency rising so high that neither country to afford to sell anything except to each other. Why would an economist suggest this as a reasonable counter-strategy?

My concern is how reliable the Yuan/Renminbi is as a reserve currency. It was only declared a reserve currency a couple years ago and it’s holdings as such are only a tiny fraction of the total. (Basically there’s the Dollar, the Euro and noise.)

Note that on that list all the other currencies are from stable democracies. The PRC is not remotely like that, so its currency is subject to the whim of very few people with highly political aims.

Having some in your bank to smooth out trade deals is okay. But holding a really large amount is economic suicide.

Lawrence Summers has served as Chief Economist for the World Bank, U.S. Secretary of the Treasury and as President of Harvard University. (The hosts of NPR’s Planet Money probably have college degrees also, but I wouldn’t know — neither has a Wikipedia page.)

This March, Professor Summers offered his opinion to the Washington Post:

The dollar has strengthened since March but in Financial Times earlier this month, Summers still does not express a sanguine view of Trump’s weak dollar policies:

It appears Professor Summers would not agree with the NPR hosts that an over-valued dollar is among our pressing problems.

They both have LinkedIn pages. Cardiff Garcia has a bachelor’s in business from Georgetown and an MS in journalism from Columbia. Stacey Vanek Smith has a bachelor’s in literature from Princeton and also an MS in journalism from Columbia. So they are well educated but journalists, not economists. This show does a pretty good job, though, of taking important and occasionally impenetrable topics and making them accessible.

Does the Yuan/Renminbi float freely now? Or is its value set by the Chinese government?

The other issue is that in order to buy yuan, the U.S. would have to print more dollars. These dollars will eventually be used to purchase U.S. products. But more dollars chasing the same number of goods is inflationary, and the U.S. govt (via the Fed) is trying to prevent inflation, not encourage it.

Can someone explain how the Chinese government can just “set” the value of it’s currency? I’ve never understood that part.

Because they’re a sovereign power.

ETA: and it’s their currency.

The government of China controls the quantity of yuan in circulation through, among other things, its Central bank, which sets interest rate and banking policies. Lower interset rats and looser lending policies increase the quantity of yuan. So if the yuan is perceived as becoming too valuable, China can act to increase the supply of yuan and reduce its value, and do the opposite if the yuan is not valuable enough.

From Wikipedia:

See also

From 2016:

+/- 2% is still insanely restrictive when you see that the Turkish lira went from around 3.5 per dollar to 7 within the last year, and was at 1.5 a decade ago. Most currencies float. China’s hovers. Since they take in so much foreign currency, all they need to do is throw more yuan into the renmibi system and it stabilizes. It’s much harder for the opposite to occur, which is why currencies that are depreciating have no easy fix besides having their central bank raise interest rates a ton to encourage people to buy more of it.

And, of course this thesis goes, the US is the only country which doesn’t manipulate it’s currency. That free trade is only fair trade when it’s to the US’s advantage.

It’s a cheap, easy and flawed accusation to throw around.

In April 2018 U.S. Treasury published its latest report into foreign exchange markets.

China, Japan, South Korea, Germany, Switzerland and India are on a monitoring list which implies these currencies are under greater scrutiny for being currency manipulators.

But as previously, the US Treasury did not label any country as a currency manipulator.

It’s a loaded and prejudicial phrase. Within recent memory the governments of emerging market economies with currencies pegged to the USD have cried foul over U.S. domestic policies. The US [correctly] focused on domestic concerns manipulated it’s currency to the detriment of it’s trading partners to the extent of exporting recessions.

But Trump by word and action on tariffs and trade wars is talking/taking down the USD to shrink the US trade deficit. Which is another form of currency manipulation.

MAGA comes at the cost of making the USD weak.
And likely losing it’s reserve currency status.