I Rest My Case!

At the Export-Import Bank’s annual conference last Thursday, President Barack Obama took the latest swipe at China’s currency policy. In his speech, President Obama argued that liberalizing China’s exchange rate would help increase consumption in countries like China that have external surpluses, and boost savings and exports in countries like the U.S. that have external deficits. “As I’ve said before, China moving to a more market-oriented exchange rate would make an essential contribution to that global rebalancing effort,” he said.

The reaction from China was immediate. When asked about President Obama’s remarks on the sidelines of the National People’s Congress on Friday, People’s Bank of China Vice Governor Su Ning said, “We don’t agree with politicizing the…exchange rate issue. We also don’t agree with a country taking its own problems and having another country solve them.”

Vice Governor Su Ning’s comments suggest two things to me.

First, they demonstrate how exasperated China must be with the United States for continuing to politicize the exchange rate issue. As we pointed out in our most recent post on the subject, “Three Misconceptions Regarding China’s Currency Policy“, many experts believe that China will begin allowing its currency to adjust by mid-year. It makes sense. China is as concerned about economic conditions in the European Economic Union as it is with the health of the United States economy, and arguably, a currency adjustment by China at this time could help the European Union the most as it struggles with economic woes in Greece, Portugal and Spain.

During the first two months of 2010, The European Union and the United States remained China’s two largest trade partners. In January and February, trade with the European Union grew by 34.5 per cent to $65.53 billion, while trade with the United States rose by 25.1 per cent to $49.32 billion. At least with respect to the dollar, the exchange rate to the yuan has remained stable over the past two years. Since the first quarter of 2009, the yuan has depreciated by almost 10 percent against the Euro.

As a result of economic problems in Europe, the dollar –and the yuan since it has been pegged to the dollar since July 2008–has been strengthening against the Euro since the end of 2009. As much as China might like to begin adjusting its currency policy to take account of these recent events, it cannot be seen as giving in to political pressure from the United States. Therefore, every time that President Obama, Secretary of the Treasury Timothy Geithner, or some other senior government official opens their mouth on the subject, it further delays the decision. If the United States brands China a “currency manipulator,” all bets are off.

Secondly, Vice Governor Su Ning’s comments demonstrate how little regard China’s leaders must have for the Obama Administration. The United States is the land of free speech, but it’s hard to imagine a high ranking U.S. government official making similar comments about statements made by China’s President Hu Jintao or Premier Wen Jiabao. The Dow Jones reporters on the scene took the Vice Governor’s comments as suggesting that the president was trying to divert attention from the U.S.’s own economic mismanagement. If that’s what he was really saying, those are pretty strong words.

While many may dismiss it as pure propaganda, the Vice Governor also made the point that I made in my last post, that liberalizing exchange rates doesn’t necessarily resolve trade imbalances. “We believe the yuan exchange-rate issue will not help shrink or increase our trade surpluses and deficits [in the U.S. or China],” he said.

Could the Vice Governor be reading Managing the Dragon?

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