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China is not a currency manipulator

Harry Reid thinks he's more likely to pass a bill labeling China a "currency manipulator" than he is to pass the jobs bill that Obama repeatedly urges Congress to pass "right now." He's probably right, but not because China is a currency manipulator.

The claim—popular among politicians and industries forced to compete with Chinese imports—that China is manipulating its currency by keeping it too weak is tough to square with the facts. As the top chart shows, the Chinese yuan has been steadily appreciating against the dollar since 1994, for a cumulative gain of 36%. The second chart shows the real, inflation-adjusted value of the yuan vis a vis a large basket of currencies, and here again we see the yuan has appreciated significantly: since early 1994 the yuan has appreciated by a whopping 58%.

Reid is not going to waste his time with Obama's jobs bill, because he knows it is no good and thus is going nowhere. He would do well to back off the China-bashing also, since it would be a very bad move. The only purpose of the "currency manipulator" finding would be to impose tariffs on Chinese imports, and those would presumably benefit only a small minority of industries and their workers, while punishing everyone else with higher prices and more inflation.

Yes, China has been "manipulating" its currency, but only in the direction of making it stronger, in part to avoid letting the yuan follow the dollar down against other currencies. This makes it more difficult for its industries to compete in the U.S., but it also raises China's standard of living—by making imports cheaper—and keeps inflation at bay. There's nothing wrong with that, and we could benefit from a stronger dollar as well.

UPDATE: I forgot to mention one other very important fact: by continually revaluing upwards the yuan vis a vis the dollar, the Chinese are unilaterally reducing the value to them of their considerable holdings of Treasury securities—some $1.2 trillion. In just the past year, raising the yuan/dollar exchange has cost the Chinese approximately $70 billion. And we want them to do this even more?

UPDATE: Dan Ikenson at Cato has a good article which goes into detail about why branding China a currency manipulator would be a big mistake.

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