You hear a lot of complaints these days from Capitol Hill and parts of corporate America that China is manipulating its currency to keep it from rising against the dollar. As a matter of fact, China is manipulating its currency to keep it from rising against the dollar. But what’s so horrible about that?
Deciding how to run your currency is one of the things that national sovereignty is all about. The United States Treasury has manipulated the dollar again and again, most recently in 2000. The European common currency, the euro, is the product of a vast currency manipulation. And the Chinese currency peg of about eight yuan to the dollar was, for most of its history, accepted and even praised by the U.S.
The reason China linked its currency to the dollar back in 1995 was to bring stability to a growing but volatile economy. It succeeded. During the Asian currency crisis of 1997 and 1998, China’s decision to hold on to its dollar peg even as it made Chinese products more expensive and less competitive was hailed by some as having saved the global economy. Now China can look back upon 12 years of mostly inflation-free, mostly uninterrupted growth–so much growth that the yuan-dollar exchange ratio has gotten out of whack, and could probably use adjusting. China’s government wants to do that adjusting slowly, as it has been doing since 2005, and not on terms set by the U.S. Congress. Can you blame it?