China Power

US Gets Tough Over Renminbi

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China Power

US Gets Tough Over Renminbi

The US House backs a tough new bill over China’s alleged currency manipulation.

Those lamenting the bickering in US politics these days might have been cheered by a fit of bipartisanship that broke out this week.

On Wednesday, the US House of Representatives voted overwhelmingly to give the administration greater authority to slap tariffs on Chinese imports to the United States. The bill, which passed by 348 votes to 79, secured the support of almost 100 Republican lawmakers at a time heading into November mid-term elections when co-operation is rare to say the least.

The move is in response to what US lawmakers see as Chinese manipulation of its currency—keeping the renminbi, or yuan, heavily undervalued (by between 20 percent and 40 percent by some estimates) to boost exports.

Speaking shortly before the Ryan-Murphy currency devaluation bill was passed, House Speaker Nancy Pelosi said: ‘(F)or so many years, we have watched the China-U.S. trade deficit grow and grow and grow. And today, we are finally doing something about it by recognizing that China’s manipulation of the currency represents a subsidy for Chinese exports coming to the United States and elsewhere.’

Many analysts view the move as a genuine escalation of ongoing US criticism over China’s currency, although the Financial Post quotes CitiFX strategist Todd Elmer as stating that although the legislation could significantly up the stakes, there’d so far been little response from commodity currencies.

‘This is not what we would expect if the market were moving to price in escalating trade tensions given that commodity currencies would be more vulnerable to any resulting fears on an Asian economic slowdown,’ he was quoted as saying.

Clearly the bill was as much about US domestic political posturing ahead of key elections as an attempt at good policymaking. With unemployment stuck stubbornly at close to 10 percent, incumbent lawmakers are keen to show constituents that they’re doing something to address their concerns.

But is there any merit to the bill? I asked leading finance commentator Michael Pettis, a senior associate at the Carnegie Endowment for International Peace and professor of finance at Peking University’s Guanghua School of Management, what he thought of the bill.

He told me: ‘I think few people would dispute the fact that the renminbi is sharply undervalued, in which case it’s certainly one of the sources of global imbalances.  The problem is that there are many other factors that matter, and focusing only on the renminbi can create additional distortions.’

Pettis said that although criticism that the renminbi is undervalued is fair, it’s not complete. He argues that although China needs to make ‘serious’ domestic adjustments, and could be criticized for having avoided most of them, that it’s ‘very difficult for them to adjust too quickly without creating huge risks in their own economy.’

Whatever the justifications for the bill, it still needs to make it through the Senate before it can be passed into law, and there the prospects are a little less certain.

China, for its part, has warned that the bill could damage economic ties between the two countries, with the Commerce Ministry reportedly adding that the move violated free trade rules (although it stopped short of mentioning whether Beijing would retaliate).

So, is Pettis optimistic that such currency issues can be addressed without developing into the full-blown trade war that some analysts are warning about? Not hugely.

‘Given the nature of political discourse, however, I’m very pessimistic that China, the US, and the other major sources of the global imbalances—Japan, Germany, and the trade deficit countries of Europe—can have a rational conversation about the adjustments each country needs to make,’ he said. ‘So I’m pretty much resigned to growing trade disputes.’