Yuan Revaluation: Now, Prepare for a Real Fight Over China's Currency
So the Chinese decided to make their exchange rate more flexible over the weekend. Now, let's prepare for the big fight in the U.S. Congress.
Saturdays are not the time I usually watch currency markets either, but the Chinese announced that they would cut the longstanding link of its currency, the renminbi, to the dollar. Instead, the Chinese currency will be linked to a basket of currencies. Then came the Great Walkback.
The Chinese currency is probably overvalued by 35 to 40 percent against the U.S. dollar, but the renminbi's appreciation will be "gradual," the Chinese emphasized once Sunday rolled around. That left economists speculating that China will allow an appreciation of 3 percent or so by the end of this year.
I have no brief against the Chinese, but they're fumbling this one, and the game is now turning dangerous. China dropped its bomb this weekend, in all likelihood, to avoid sliding into an uncomfortable spotlight at the G20 meeting that is happening next weekend in Toronto. They may yet achieve that emphemeral diplomatic goal. But the fight with the United States over the exchange rate, which allows China to rack up huge trade surpluses on the American dime, is going to enter a new, less predictable phase.
There's a broader problem here. China has benefited tremendously from its integration into the world economy, a process underpinned by foreign trade and investment. Now the global economy is seriously out of whack, relying too much on demand in one place (the United States) and too little on demand in other places (notably China and Germany). But China still views the global system as something it takes from, rather than a framework for which it bears some responsibility. In the words of Robert Zoellick, a former deputy secretary of state and now president of the World Bank, China is not a "stakeholder" in the international system. In fact, it's a free rider on the world economy.
No wonder that Sen. Charles Schumer, the New York Democrat who has been banging the currency drum the loudest among senators, did not let the announcement get him excited -- at least not in a good way -- when he issued a statement on Sunday. A more credible revaluation might have at least cooled him off, but that's not what happened. China's promised details about the new exchange rate mechanism seems to interest him not a whit:
Just a day after there was much hoopla about the Chinese finally changing their policy, they are already backing off. We intend to move forward as quickly as possible with legislation. It is only strong legislation that will get the Chinese to change and will stop jobs and wealth from flowing out of America as a result of unfair trade policies.I would not want to be Tim Geithner right now. The Treasury Secretary, who has more than a little on his plate as Congress puts the finishing touches on the biggest financial sector reform since the Great Depression, will now have to defend China before the U.S. Congress. The Obama administration does not want to slap tariffs on an important trading partner whose goodwill it also needs on a variety of non-economic issues (Iran, North Korea, etc.) But it needs Schumer and his pals in the U.S. Senate even more, and they already feel they've been played long enough.
This issue is on some level a game of diplomatic management. The administration pushes China, insisted all the while that Congress is nipping at its heels. And China gives just enough to let the administration make a credible argument that they are making progress.
The only problem is: this time, the Chinese gave the Obama administration squat.