Geithner Is Wrong about China's 'Currency Manipulation'

In Tim Geithner's written responses to questions from the Senate Finance Committee that recently approved his nomination to be our next Treasury Secretary, he says that President Obama "believes that China is manipulating its currency."

I would agree with him that China has been "manipulating" its currency, but only in the sense that the rate of exchange between the yuan and the U.S. dollar has been far more stable than if it had been left to the vagaries of the market. I would hasten to add, however, that most of those who accuse China of "manipulating" its currency also believe that the Chinese currency should be far stronger against the dollar than it currently is (and, by inference, the U.S. dollar should be far weaker). I take great exception with anyone, especially our Treasury Secretary, who believes the U.S. dollar should be weaker against any currency. A strong currency is always in every nation's best interest, because it provides the bedrock for confidence, investment, and progress. Geithner is starting off on the wrong foot.

In any event, as this chart shows, the Chinese yuan has been strengthening against the dollar for the past 14 years. What more do weak-dollar advocates want? The Chinese are guilty of "manipulating" their currency only to the extent that they have sought to slow the pace of its appreciation vis a vis the dollar. But is that "manipulation" in the sense of doing something wrong? No.

According to the teachings of international finance, a country can manage its currency in only one of three possible ways: by targeting an interest rate (typically the overnight lending rate); by targeting the quantity of money in circulation (e.g., Volcker's targeting of M2); or by targeting its exchange rate vis a vis another currency or basket of currencies. When you target one monetary variable, the others find their own level and the economy adjusts. The Chinese economy has had plenty of time to adjust to its currency target.

Since 1994, the Chinese have targeted the exchange rate of the yuan vis a vis the dollar. They have done this by buying up most of the capital inflows (call them dollars) that were seeking to enter the red-hot Chinese economy. If they hadn't bought the excess dollars seeking to purchase yuan and yuan assets, the yuan would have appreciated much faster. This is perfectly acceptable; by purchasing the excess of dollars (a trillion or so), the Chinese central bank created new currency, which was then absorbed by an economy growing in excess of 10% per year. And by amassing a huge pile of foreign reserves in the process, the Chinese central bank has given the yuan rock-solid status, and that is a boon to the Chinese economy because it guarantees that investments in China won't be wiped out by a devaluation. A strong Chinese economy that can sell us cheap and quality goods is a win-win for everyone.

Geithner was confirmed with haste, and his sins were overlooked, all in the name of responding quickly to the current economic crisis. That sounds a lot like what the Obama administration is trying to do with the stimulus package. These are ill-considered moves, wrapped in the cloth of urgency, which are more likely to result in a permanent expansion of government than a quick resolution to our problems.

And this is one more reason why our stock and corporate bond markets are so depressed.

Comments

[who:]

TG is playing the old game of it is always easier to blame other people for your own problems.

Idea that balance of trade can be address by exchange rate is simplistic thing. China produces low end goods (toys, clothes, etc.), while US produces high end goods (software, financial products, etc.).

I am surprised that TG got the job, as key player in letting LEH fail was a big mistake that added oil to the fire.

Jan 28 05:09 AM

[Panda@War:]

Geithner is an old China hand. One must be mistaken in taking his PC argument as the face value. He knows what's going on.

Beyond served well in getting his job, the remark is a calculated move to gain some virtual negotiating power. We all know without China's strong commitment, both Obama's urgent bailout/s and his financial reform would doom to failure. To negotiate with China, US has few chips left, namely, human rights, currency manipulator, military threat to the world, no religious freedom, T&T (Taiwan & Tibet). It's Obama's desperate attempt to pull one of these skeletons out of closet, in order to "secure" China's first round of commitement buying into the massive new govt debt issue.

Jan 28 06:56 AM

[Tradememe:]

Mitigating wild currency fluctuation is ok, but maintaining a static currency peg for years is not good for the world economy as it creates imbalances. Eventually, the imbalance will become so acute that the correction will be abrupt and painful for everybody.

Jan 28 07:31 AM

[y3115y:]

He might just want to get a few more votes from Congress for his job. Don't be serious. We are printing a lot of money, and devalue $. I don't think we need China to help to devalue our $,

Jan 28 08:02 AM

[Truefire:]

And so it goes, on & on. Currency manipulations. Its a race to the bottom. Who can devalue the fastest (inflate) so that all the overhanging debt can be paid off.

When will we learn that the debt would be a fraction of what it is now if we were on some type of gold standard. There would be no reason or ability to inflate, hence no currency war, if we had a gold standard. My opinion!!

Jan 28 08:15 AM

[monday1929:]

Why would you be suprised that someone who failed in his duties to protect the banks and regulate 900 trillion in derivatives would be given more power? What better qualifications could one have?


On Jan 28 05:09 AM who wrote:

> TG is playing the old game of it is always easier to blame other
> people for your own problems.
>
> Idea that balance of trade can be address by exchange rate is simplistic
> thing. China produces low end goods (toys, clothes, etc.), while
> US produces high end goods (software, financial products, etc.).
>
>
> I am surprised that TG got the job, as key player in letting LEH
> fail was a big mistake that added oil to the fire.

Jan 28 08:31 AM

[Chris B:]

Why is it everyone screams "manipulation" when the Chinese government acts to manage its own currency, but when our government sets interest rates, engages in open-market activities, and employs thousands of economists and currency analysts with the goal of controlling the value of the dollar it is considered "management" or "regulation." Do you think our government takes no action to affect exchange rates, inflation, or money supply? Ha!

Every country with a currency "manipulates" that currency to acheive policy goals, including the US. Chinese workers would work for the equivalent of 50 cents an hour if paid in either yuan or dollars. They're that poor and desperate. That's why you can't buy anything made in the USA @ $20/hr any more. So let's get over ourselves, face reality, and quit making up dumb excuses and conspiracy theories.

Jan 28 09:54 AM

[Ferdinand E...:]

A very interesting and perhaps important article. I wonder what the new president was thinking about when he appointed TG.

And a great comment by Chris B., although I would like to adjust something he said to 'every intelligent country manipulates its currency in order to achieve policy goals'. The ignoranuses in this country - Sweden - want the opposite: they want Sweden to adopt the enron so that the currency cannot be manipulated, and to allow the exchange rate to be determined by EU morons.

Jan 28 10:04 AM

[kelm:]

I'll make a prediction that Geithner will be the first to leave the cabinet. His was a decision made quickly and with a view to maintaining some continuity with Paulson and the TARP. Geithner is merely going to do what Summers say.

The whole China issue is political. I agree Obama has little leverage. Blaming China because we failed to save and created financial instruments that are wrecking the system is ludicrous.

Jan 28 11:21 AM

[TonyP4:]

It is partly true that Chinese manipulate the currency. However, it has no effect on American export to China. As American culture (or all others too), it is easy to blame others than ourselves: it is nothing wrong with my government and our citizens (both are big spenders and fight the wars we cannot afford), but the ‘evil’ Chinese.

- Chinese currency and I think Hong Kong too were basically pegged with US’s, so it would not affect import/export with currency fluctuations. Now, it is pegged mainly with US and EU.

- Most countries would like to increase the value of its own currency. If you borrow from me with my country’s currency and it increases its value by 10%, you need to pay me 10% more with your own currency.

For the same scenario, I can buy your country’s assets (like land, factories…) 10% cheaper.

- The drawback. It discourages import from US to China in theory if Chinese currency is adjusted to the market - explain later.

It is not true as US and China are perfect trade partners. The majority of Chinese goods are of cheap, low-cost consumer products and US goods are of high-tech and wheat… In a sentence, they do not compete with each other.

China keeps the currency close to US, so it has to eat their profits by reducing jobs loss. The US consumers benefit by low cost consumer goods. If you argue the jobs also go to China. With the US high salary, it would go to other developing countries if not go to China. So, it is a win-win situation for US.

- “to adjust to the market”. One way is go back to the gold standard that waw removed by US. Basically your currency value is adjusted by the gold reserve in your central bank.

It is over-simplified for discussion.

Jan 28 11:56 AM

[ag2009:]

I wrote a paper on this topic a month back.
In the paper, I explore the economic crisis by revisiting the historic ideas surrounding usury and miserliness. I explain why these were economically destructive activities, and why they were socially stigmatized or made illegal. The paper then moves to the international relations. I argue that the Chinese government has been acting as miser and usurer on the world stage, at the expense of their citizens and global productivity. The thesis, essentially, is that world needs to balance spending vs. saving/investing/lendi... and if too many people do the latter then a rebalancing is inevitable. The current economic crisis is that rebalancing.
The full paper can be downloaded from ssrn.com/abstract=1332...
Please email me at the site with any comments.

Jan 28 02:14 PM

[Duude:]

I did find Geithner's response in the confirmation hearing that Obama believes China is manipulating its currency as a strange way to answer the question. We didn't even get "we believe". Is it a Freudian slip, or an attempt to change one's rhetoric depending upon the audience? Regardless, the trade imbalance has less to do with currency manipulation and more to do with just protecting markets. China only opens markets where foreigners must enter into joint ventures with Chinese companies splitting the profits, and even making for contingencies that require the foreign corporation to divulge technological secrets if needed. They then start new domestic companies that produce identical products with a different package for less. Its far less about currency manipulation and more about truly free markets with the backing of a strong Chinese trademark, copyright, and patent law.

Jan 28 05:18 PM

[Mickey 13:]

For anyone that studies China, it is well established that their banking system is not yet stable enough to float their currency. Obviously China would want to secure the best trade position as they can, we would do the same. Geithner has already shown himself as a liar and a tax evader, a poor manager of Wall St issues (Bear Sterns and Lehman Bros.) and now contrary to another Obama "principal" has hired a Goldman Sacs lobbyist as his chief of staff. Don't be too blinded by the glow radiating off Obama and Geithner, their stimulus proposal is a huge welfare package that will bankrupt Americans for many generations to come...

Jan 28 09:28 PM

[gdog:]

China slows rate of currency adjustment, huge trade imbalances ensue.

China re-invests money in us treasuries, rates are held low, everything must balance, simultaneously financing chinese manufacturing sectors.

Us awash in cheap financing, and poor regulatory control, (thank you very much) goes on spending spree, mostly on houses, but also on chinese goods furthering the cycle of imbalance. Crash and burn.

How is that not negative manipulation?

Jan 29 01:46 AM

[gdog:]

China's comments at davos, assailing the spending habits of the american consumer is a case of biting the hand that feeds them.

China needs the US consumer. This is a country with little innovation, and little inclination to spend, with huge reserves of us treasuries. They could choose not to take more, but to what end? Much higher interests rates that devalue their us treasury reserves, and cripples their exports? Yeah right.

Instead of buying their cheap goods with all this cheap printed money, we need to invest in this country, and they sure better finance it after we financed their manufacturing infrastructure. In fact they need to.

I guess some people just don't believe in this country.
On Jan 28 06:56 AM User 346013 wrote:

> Geithner is an old China hand. One must be mistaken in taking his
> PC argument as the face value. He knows what's going on.
>
> Beyond served well in getting his job, the remark is a calculated
> move to gain some virtual negotiating power. We all know without
> China's strong commitment, both Obama's urgent bailout/s and his
> financial reform would doom to failure. To negotiate with China,
> US has few chips left, namely, human rights, currency manipulator,
> military threat to the world, no religious freedom, T&T (Taiwan
> & Tibet). It's Obama's desperate attempt to pull one of these
> skeletons out of closet, in order to "secure" China's first round
> of commitement buying into the massive new govt debt issue.

Jan 29 03:20 AM

[Panda@War:]

China is a country with little innovation...?

True and false. True is that China is not known for now as a good innovator compared to some most advanced economies in the world. False that you can not based your entire argument on this, because the fact is evolving, fast!

Check out China's current position and trendline on world patent filing; or get a grip at her total scientific papers published; or just simple take a look on the PhD ( less in quality but improving fast) she produced on yearly basis. China is a country of arguablely the most innovations in history of mankind and she is coming back form a mismanagement of Mao's cultural revolution, which destroyed a whole generation of her innovation pool.

This is a country that has many parts of the value chain in control. Yes, she needs cheap manufactoring jobs for her many millions of peasant. But she also wants to quit the "cheap habit" of thin-margin biz and is migrating to higher end of the value chain. The step needs to be taken sooner or later, this world recession provides a strong motivation. Thus she can afford to "bite one hand that feeds her", while grabing tighter the other hand which is "high tech import"for assimilation and improvement.


On Jan 29 03:20 AM gdog wrote:

>
> China's comments at davos, assailing the spending habits of the american
> consumer is a case of biting the hand that feeds them.
>
> China needs the US consumer. This is a country with little innovation,
> and little inclination to spend, with huge reserves of us treasuries.
> They could choose not to take more, but to what end? Much higher
> interests rates that devalue their us treasury reserves, and cripples
> their exports? Yeah right.
>
> Instead of buying their cheap goods with all this cheap printed money,
> we need to invest in this country, and they sure better finance it
> after we financed their manufacturing infrastructure. In fact they
> need to.
>
> I guess some people just don't believe in this country.
> On Jan 28 06:56 AM User 346013 wrote:

Jan 29 06:04 AM

[gdog:]

Laoshi used to say "Pandas are funny bears, but gentle by nature."

And I do not mean for my comments to inflame your otherwise peaceful nature however, you are talking about potentials at least a couple decades down the line. For the time being, China is dependent on exports, and needs to continue depending on it's best trading partners. Or those potential you speak of will be significantly delayed, or even thwarted. Value chain migration does not happen over night, it is a decades long process.

One thing you mention that may be true, china's increasing Ph.ds and patents; i agree. Yet I find this odd; to cite increasing levels of intellectual capital in a country with such disrespect for intellectual capital protection and such a tendency for piracy. These tendencies are natural barriers to innovation, why come up with clever ideas, and why share them if they can't be protected from reckless "assimilation" without regard.

us is a country of scrappy entrepreneurs, innovators, and voracious consumers, and china is ill advised to criticize the very economies that have helped accelerate her growth.




On Jan 29 06:04 AM Panda@War wrote:

> China is a country with little innovation...?
>
> True and false. True is that China is not known for now as a good
> innovator compared to some most advanced economies in the world.
> False that you can not based your entire argument on this, because
> the fact is evolving, fast!
>
> Check out China's current position and trendline on world patent
> filing; or get a grip at her total scientific papers published;
> or just simple take a look on the PhD ( less in quality but improving
> fast) she produced on yearly basis. China is a country of arguablely
> the most innovations in history of mankind and she is coming back
> form a mismanagement of Mao's cultural revolution, which destroyed
> a whole generation of her innovation pool.
>
> This is a country that has many parts of the value chain in control.
> Yes, she needs cheap manufactoring jobs for her many millions of
> peasant. But she also wants to quit the "cheap habit" of thin-margin
> biz and is migrating to higher end of the value chain. The step
> needs to be taken sooner or later, this world recession provides
> a strong motivation. Thus she can afford to "bite one hand that feeds
> her", while grabing tighter the other hand which is "high tech import"for
> assimilation and improvement.
>
>
> On Jan 29 03:20 AM gdog wrote:

Jan 29 03:13 PM

[Ian Yung:]

不错不错

Feb 02 09:49 AM