China has been in the news throughout the week, announcing that it would loosen controls on the yuan, and allow the currency to get closer to a free floating currency, causing the IMF to applaud the Chinese decision.
China recently released its first-quarter GDP figures, which came in lower than expected at 8.1%. This is the slowest pace in three years, and was below the median forecast.
Also this week, China posted data that showed weak exports and pinpointed deteriorating global economic demand for its goods.
All of these trends have caused the Chinese yuan to rise against the dollar even further, continuing what it has been doing for the past two years. So, are U.S. politicians justified in their arguments against the Chinese?
The U.S. Political Debate
It seems that China has been the target of most politicians over the past few years. Obama recently called on China to "play by the same rules as everyone else," and has been bringing more and more trade cases against it at the World Trade Organization.
Even Mitt Romney's campaign has issued statements about potential Chinese allegations when it comes to trade and currency, but all parties have still come short of calling China specifically a "currency manipulator."
This is likely one of the reasons China made the move to open its currency up more than in the past.
The Economic Realities
The main reason everyone is falling short of that is because the economic realities don't match a country manipulating its currency. First, China's current account surplus has fallen by almost 50% in 2011, and is overall way down from its peak in 2007.
Second, the Chinese Premier has signaled that Beijing's engineering of the yuan's appreciation is over and he said in March that he feels the currency is possibly near equilibrium.
While still falling short of allowing for a true floating currency, China is taking steps in that direction and it sees both the falling current account surplus and rising imports as a necessary precursor to having a floating currency.
Although there are still many issues involving Chinese trade that are challenging to American companies, it is evident that the Chinese are working to balance the playing field in the currency market and that trade reforms are having a positive impact on the value of the currency relative to the dollar.
Pot? Meet the Kettle
The U.S. is manipulating its currency. It's unavoidable. As I wrote in the past, the prime minister of the UK has even recently discussed how the U.S. is exploiting the fact that the dollar is the reserve currency in the world in order to print more dollars, water down the value of foreign dollars, and spend the money into the U.S. economy.
If the U.S. is going to continue to talk tough about currency manipulation, it is going to need to walk the walk. Of course, I'm not exactly betting on that to occur anytime soon, not even if President Obama and Ben Bernanke are replaced.
The long-term investment solution should be fairly obvious to the investors who have been talking about the above "manipulation" by the U.S. for the last several decades: gold, hard assets, and international diversification for the long term, and, if Jim Rogers is right, stocks for the relatively short term, unless we begin to see a new recession.
Disclosure: I own physical gold and silver, and plan on buying more regularly for the foreseeable future.