The US Dares Not Act Rashly on the Renminbi

The U.S. Treasury Department released its semiannual currency report on Tuesday, not yet listing China as a currency manipulator, but reiterating that the yuan is severely undervalued. The global economy is becoming highly integrated; the U.S. and China share considerable and closely-tied mutual interests. If the U.S. labels China a currency manipulator, the resulting trade war will inevitably harm both countries, so the U.S. will certainly take a cautious approach. However, it will also not let up on pressure to increase the value of the renminbi, as it hopes to garner greater political and economic benefits. China must insist on the legal principle of a state’s sovereign rights over exchange rate issues and take a firm grip on its rights regarding changes to the renminbi exchange rate. It should not submit to pressure from any state, but steadily implement reforms on its own.

The renminbi exchange rate issue is a frequent target for U.S. politicians; it becomes particularly heated during sensitive periods such as the general election. During the recently-concluded U.S. general election, Republican presidential candidate Mitt Romney swore that “on day one of my administration I will label China a currency manipulator.”

After defeating Romney to win a second term in office, Obama has not acted rashly to designate China a “currency manipulator.” This clearly illustrates the principle that what is said during elections is quite separate from reality. The U.S. and China are the two largest economies on the planet; each is the second-largest trading partner of the other. Last year, total trade between the two countries reached USD $540 billion. They have become highly dependent on each other, with a relationship of reciprocity and mutual benefit. The U.S. completely comprehends the importance of stability in both economies. Although it makes a show of saber rattling over the exchange rate policy, in the end, it decides every year that China is not a currency manipulator. Even if Romney had been victorious, he would not have dared make such a rash decision. Public opinion in the U.S. indicates that Romney’s electoral promise on the renminbi exchange rate may go down as the weakest promise in history.

The U.S. is unrelenting in its hounding of China over the issue, but forcing the renminbi to appreciate by a large degree is tantamount to forcing China to give concessions to the U.S. China is the largest creditor of the U.S., holding almost $1.2 trillion in U.S. securities. An appreciation in the value of the renminbi would effectively shrink the U.S. debt, while a large portion of China’s wealth would vanish. The U.S. wishes to revitalize its manufacturing industry, increase employment opportunities and force the appreciation of the renminbi as a shortcut toward magnifying its companies’ international competitiveness. Most noteworthy is that during every crisis, the U.S. relies on passing the buck to others to weather the storm. It generally first acts on the exchange rate and forces an appreciation in the target country’s currency, as with Japan being the sacrificial lamb of the Plaza Accord. Currently, the U.S. is stuck in economic mud, so it is attempting once more to force the renminbi to appreciate.

The battle over the exchange rate is, at its core, a matter of currency sovereignty. Since initiating renminbi exchange rate reforms in 2005, China has seen its currency appreciated almost 30 percent against the dollar. How next to set the exchange rate will naturally be based on what is beneficial to China’s economic development and the stability of its monetary system. With this foundation, China will steadily push forward with reforms for the marketization of the renminbi’s exchange rate; direction from the U.S. is not required.