China’s monetary policy has grabbed headlines in recent months, with both Treasury Secretary Tim Geithner and a bipartisan group of senators urging decisive U.S. action against Chinese currency manipulation earlier this year. We all know that China continues to play an increasingly important role in the global economy, but what, you may ask, is “currency manipulation,” and why is everyone so up in arms about it?
This seemingly complex issue can be reduced to one of the most basic concepts in economics. Or to quote Paul Krugman, “the renminbi thing isn’t at all hard to explain — it’s just supply and demand.”
For starters, the Chinese currency is actually called renminbi (RMB), which means “the People’s Currency.” (The popular unit of renminbi is yuan like dollars.) Many charge that the Central Bank of China is artificially increasing the supply of renminbi in China, which makes it cheaper because there’s more of it in circulation. So if China is artificially devaluing their currency, they’re “manipulating” it — which is a pretty strong accusation in global econospeak.
But why would the Chinese devalue their currency? The simple answer is trade. The country’s monetary policy makes it much cheaper to manufacture goods in China, which ultimately means that Chinese exports enjoy an unfair advantage in the global marketplace. Put in the simplest terms, the more China earns from exports, the less it spends on imports.
This scenario puts American companies and products at a distinct disadvantage. And U.S. trade deficits ultimately translate into job losses — with some estimates running as high as 2.4 million jobs lost since 2001. (We should note that some economists also attribute spendthrift U.S. habits and low interest rates to U.S.-China trade imbalances.)
China’s valuation of the renminbi has been debated for some time now, but the recent financial crisis and persistent high rates of unemployment in the U.S. have led to mounting pressure on the White House to label China a “currency manipulator.” However, the U.S. Treasury recently decided now to delay the publication of a report on Chinese currency valuation, originally due on April 15, to provide more time for diplomatic negotiations between the two countries.