According to the Financial Times, a politically sensitive report that was released on Friday afternoon by the US Treasury suggested that the high levels of inflation in China meant its real exchange rate had risen exponentially since it was allowed the opportunity to appreciate last June. The United State’s refusal to call China a currency manipulator outright is a prudent decision, as the US government maintains the evidence of this is limited; however, the rhetorically cautious report does say that the appreciation of the renminbi is occurring at an insufficient rate and urges the allowance of its continued appreciation.
As cited in a Wall Street Journal article, outspoken Democratic Senator Charles Schumer, who has been at the forefront of criticism of the Chinese exchange rate policy has along with Senate Finance Committee Chairman Max Baucus criticized the Obama administration for not labeling Beijing as a currency manipulator. However, notably, no critics from either side of the aisle have introduced punitive legislation.
The obvious trade advantages China serves to gain by undervaluing its currency in order to increase exports, and thus, its GDP are clearly the primary issue of concern for the United States. However, allowing the renminbi to appreciate may have advantages for China in its own right controlling inflation, preventing bubbles, and tamping down speculative buying.
On the opposite side, the currency manipulation that is alleged to be occurring has an adverse effect on emerging-nation economies as a direct result of these policies. Countries cited in the Wall Street Journal article aforementioned such as Brazil are currently experiencing a rapid influx of investment that has the capability of overrunning the economy. These findings could aid the negotiating position of the United States at the upcoming G20 conferences. Tim Geitner has in the past used the G20 conference to put pressure on the Chinese government in relation to currency manipulation.
However, the issue is one that is as politically sensitive as it is economically. According to MarketWatch the Yuan has appreciated 3.7 percent against the dollar since January. Projections from the US Treasury state that the appreciation rate will occur at roughly 6 percent annually. Taking inflation into account, this equates to roughly 10% per year if it continues to appreciate at this rate.
The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com
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