China is getting a lot of flak these days as a currency manipulator. Sure, no one disputes that the PBoC intervenes regularly in foreign exchange markets, so that makes it a manipulator, if you like to use such loaded language.
But if we want to see past all the heated rhetoric, we should ask how successful the manipulation has really been in maintaining the competitiveness of Chinese goods.
To answer that question, we need to look not just at nominal exchange rates, but at real rates. In nominal terms, the yuan has strengthened about 2.2% since China's June 19 decision to ease its currency policy. That works out to an annualized rate of nominal appreciation of about 8 percent.
The simplest way to calculate real appreciation is to add on the difference between China's inflation rate (3.5%, according to August data) and US inflation (about 1%). Doing so gives us an annual rate of real appreciation of something like 10.5%. Two or three years of that would pretty well eliminate the 20 to 40% undervaluation that critics are talking about. True, three years is longer than the time horizon of your average politician, but it's not exactly a glacial pace of change, either.
But wait, you might say, we can't be sure that China will continue to allow an 8% rate of nominal appreciation. The latest hints from inside the PBoC suggest that 3% nominal appreciation could well be the maximum. Wouldn't that mean it would take a lot longer to correct the existing undervaluation?
No, not necessarily. In order to slow the rate of nominal appreciation, the PBoC would have to step up its currency intervention. Chinese inflation is already accelerating month after month. Slowing nominal appreciation from its recent 8% pace would increase inflationary pressure even more, both by keeping import prices from falling, and via the newly minted yuan that intervention pumps into China's domestic money supply. With inflation accelerating further, the rate of real appreciation might not slow by much, if at all.
The bottom line: Yes, China is a currency manipulator, but not a completely successful one. Condemning as trivial the 2% appreciation of the yuan since June sounds good in the halls of Congress, but that number far understates the rate at which the yuan is really losing its competitive edge against the dollar.