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Editor’s note: “China is a currency manipulator.” It’s a charge that’s been leveled for years and has prompted politicians, most recently President Trump, to threaten punitive retaliation.
The argument is that China keeps its currency artificially cheap, so it can export cheaply to the rest of the world, thereby keeping Chinese workers employed making the exports. We’re working on a NewsHour segment to explain all of this. It should air soon.
But in the meantime, is the Chinese “yuan,” also known as the “renminbi” or “people’s money,” artificially cheap or isn’t it? And how could you tell?
One approach is to look at something that’s sold the world over, like a Big Mac — something that consists of standard ingredients that can be bought on international markets. The ingredients should cost the same everywhere. So if the price of a Big Mac in China is much lower than the identical product in the U.S., that would suggest China is making goods in China artificially cheap by depreciating its currency.
It was The Economist magazine that came up with the “Big Mac Index” in 1986 to lightheartedly measure relative currency valuations. We did a NewsHour story on the index in 2004 and revisited the index more skeptically in 2014. Today, economist Benn Steil adds his own note of skepticism and offers his own preferred way of measuring relative currencies: the Mini Mac Index. And you’ll see that by the Mini Mac Index, China is a lot less of a currency villain than some and the Big Mac Index would have you believe. (A version of Steil’s column first ran on the Council on Foreign Relations’ Geo-Graphics blog, which we’d recommend to anyone.)
— Paul Solman, economics correspondent
The “law of one price” holds that identical goods should trade for the same price in an efficient market. But how well does it actually hold internationally? The Economist magazine’s famous Big Mac Index uses the price of McDonald’s Big Macs around the world, expressed in a common currency (U.S. dollars), to measure the extent to which various currencies are overvalued or undervalued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose.
Big Macs travel badly, however. Flows of burgers across borders won’t align their prices. So in 2013, we created our own Mini Mac Index that compares the price of iPad minis across countries. Minis are a global product that, unlike Big Macs, can move quickly and cheaply around the world. As explained in this video, this helps equalize prices.
As shown in the graphic at the top, the Mini Mac Index suggests that the law of one price holds far better than the Big Mac Index suggests. Both indexes currently show the dollar overvalued against most currencies. But the Big Mac Index puts the average overvaluation at 25 percent — a Whopper. Our Mini Mac Index puts it at only 11 percent — small fries.
By far the most interesting difference between the two indexes is their valuations of China’s currency, the renminbi. The Big Mac Index puts the renminbi’s undervaluation at a supersized 45 percent, which if true, would provide ammunition for the currency warriors in the White House.
During the presidential campaign, Donald Trump and trade adviser Peter Navarro blasted China for “currency manipulation” — for intervening in foreign-exchange markets to push the renminbi down and boost net exports. They called for massive U.S. retaliatory import tariffs.
But China’s recent central bank interventions have been to keep its currency up, not down, owing to fear of capital outflows and losses in foreign-exchange reserves driven by investors nervous over rising debt and poor growth prospects. This suggests that the Big Mac measure won’t cut the mustard. Our Mini Mac Index, in stark contrast, shows the renminbi to be undervalued by a mere 3.7 percent. Don’t expect the White House to be citing it.
Dr. Benn Steil is senior fellow and director of international economics at the Council on Foreign Relations in New York. He is also the founding editor of International Finance, a top scholarly economics journal, and lead writer of the Council’s Geo-Graphics economics blog.
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