Long seen by successive administrations as a fair and independent arbiter of global exchange rates the International Monetary Fund is about to upset some in Congress if, as expected, it announces that China’s yuan (or renminbi) fairly valued for the first time in more than a decade, a Wall Street Journal article reports.
Few outside of China argued back in the last decade that China gave its companies an unfair competitive advantage by keeping the currency below a level that normal market forces would have achieved. Now, after a decade in which the yuan has been allowed to appreciate by more than 30% against a basket of currencies, senior IMF officials say the exchange-rate value is roughly appropriate the WSJ reports.
US firms have argued that China’s currency supported economic expansion came at the cost of American jobs, exports and growth, an argument mirrored in Europe and elsewhere as China’s trade surplus mushroomed in the run up to the financial crisis.
Moving Toward Balance
The IMF believes the currency is now moving toward equilibrium – which isn’t the same as saying it is at a fair value, more that its getting there, but it certainly takes steam out of ongoing efforts to roll currency manipulation into recent trade legislation.
Officially, the Obama administration disagrees with the IMF’s position but, in part, the appreciation of the yuan is down to the dollar itself. The yuan is pegged by Beijing to the dollar, as the dollar has appreciated so has the yuan against a basket of currencies including the now-weak euro and Japanese yen.
As the newspaper rightfully points out, gauging the appropriate value of exchange rates is far from an exact science given the number of variables involved but one metric is trade and foreign currency reserves.
As this graph from the WSJ shows, as the currency has depreciated China’s currency account balance has gradually fallen. From running a massive trade surplus equivalent to 10% of GDP in the second half of the last decade it has fallen to 2.5% now.
China’s Not the Only Manipulator
It may be more appropriate for lawmakers to focus on is the position of Germany which has now surpassed China as the world’s largest trade-surplus economy. Germany’s trade surplus is projected by the IMF to hit 8.4% of GDP this year.
According to Trading Economics, Germany posted a €19.2 billion trade surplus in February 2015, up from €16.2 billion a year earlier, February followed on with a €15.9 billion trade surplus in January and a €18.9 billion surplus in December. Whereas, China’s is falling Germany’s is getting larger, and unlike China, Germany is doing nothing about it.
International Trade Agreement
The president’s TransPacific Partnership free trade agreement, a trade pact among 12 Asia-Pacific countries representing 40% of the global economy, was threatened by the IMF’s position labeling China a currency manipulator. Now, those opposing the agreement may have to shift their attention to other partners in the pact such as South Korea, Singapore and Malaysia, all of whom are called out by the WSJ as countries whose exchange rates “didn’t reflect economic dynamics.”
South Korean exports of steel products into the US, for example, have been on the rise even as US consumption has been falling and domestic steel producers’ capacity utilization has been under pressure. Clearly, currency will continue to be a major concern among producers and consumers as producers chase business in a weak global market, but watch China’s exchange rate in the year ahead. Domestic pressure will mount for Beijing to intervene and allow the recent appreciation to reverse if growth continues to slow, that will be the real test of their sincerity to have a fairly valued exchange rate.