The Chinese RMB at Equilibrium Paul Krugman, Where Are You Now?



Readers will no doubt recall the almost incessant Western media attention paid to the Chinese RMB during the past several years, the constant claims of China ‘cheating’ by keeping its currency undervalued, the accusations of currency manipulation, of the (weak and helpless) US whining for a ‘level playing field’, the regular threats to condemn China as a ‘currency manipulator’.

But lately, aside from Mitt Romney’s self-serving China threats, the subject seems to have disappeared from Western radar. With good reason, we might add.

China had maintained all along that the RMB exchange rate was not seriously out of line with most of the world’s currencies and that modest creeping adjustments would rectify any anomalies. However, China’s moderate voice was drowned out by the cacophony of rabid voices from the West.

First among these voices would be Paul Krugman, the NYT’s (and Princeton University’s) Renminbi Rambo, whose increasingly shrill denunciations of China’s currency policy peaked in an almost hysterical tirade that claimed in part, “…. in China’s case, …. thanks to currency manipulation on a scale unprecedented in world history…”

We also had US Treasury Secretary Timothy Geithner, hoping to make it into the big time with similar undocumented accusations about China cheating on its exchange rate. And of course, like a recurring bad dream, we had the Jewish US senator Charles Schumer claiming that China’s RMB was undervalued by “at least 25% to 40%”.

But then the US FED began its ‘quantitative easing’ (QE1, 2 and 3), and someone pressed Krugman’s “mute” button. In the face of a sure onslaught of public criticism of his blind ideology, and with no moralistic defense for the US grossly inflating its currency and spreading that inflation to the rest of the world, Krugman appeared to have abandoned economics and suddenly became an op-ed expert on social and political policy.

Krugman was never able to face the bare facts that it was the US, and not China, that was ‘manipulating its currency on a scale unprecedented in world history’, so he chose to hide in the bushes and take up a different line of work. Geithner and Schumer went strangely silent too, at about the same time.

China did somewhat delink the RMB from the US dollar and widen the trading range. These moves, coupled with China’s increasing economic strength during the US financial meltdown, resulted in a gradual appreciation of the RMB by some 22% over 5 years, but none of that would have been attributable to any significant prior undervaluation.

In any case, even after this 22% rise, Krugman, Geithner, Schumer and others, were still wildy claiming the RMB was undervalued by yet “at least another 25% to 40%”.

These gentlemen were not easy to satisfy, but China held its ground, steadfastly maintaining that the RMB was reasonably valued and demonstrating a frustrating unwillingness to commit economic suicide just to please the US.

It is true that China had a large trade surplus with the US, but it is also true that China had trade deficits with many other countries, many of which had currencies that were fully convertible. Such a situation cannot exist if that currency is much undervalued.

And today, the RMB appears to fluctuate steadily within its narrow trading band, moving both up and down in relation to other world currencies, with published expectation from many world bankers of a small (2% or so) decrease during the next 24 months. These expectations describe well a currency that is trading roughly at its equilibrium value.

In retrospect, it would appear that China’s currency policy had been quite appropriate, and that the RMB was never much out of line with its economic realities.

It is now obvious to anyone who looks, that the intense and unrelenting public pressure on China to revalue the RMB was entirely a political attempt by the US to do to China what was done to Japan with the Plaza Accord – destroy the economy of a serious competitor.

In the case of Japan, still being a US military and political colony, the US had the power to force that agreement; a power that was sorely lacking in the case of China, hence the grand media campaign intended to exert overwhelming international political pressure on China to revalue the RMB and commit suicide.

Geither tried valiantly until the end – in fact, until well past the end – to put a brave face on US claims about China’s currency. The US, with Geithner and others, exerted substantial political pressure on the G-20 members to condemn China’s currency policy at their last meeting.

They failed, miserably. In fact, they failed so badly that Obama was cut out of the group photo taken at the session’s end.

Not only did those 19 nations not condemn China as the US demanded, but they were unanimous in condemning the US for the selfish damage its reckless QE policies were inflicting on the nations of the world. Germany’s finance minister called the US “clueless”.

Many observers commented that if there was a single point that identified the US’ slide from local bully to also-ran, it was that G-20 meeting, where the other 19 nations were united against the bully.

In any case, we can now be grateful for Krugman’s silence. With luck, his declining professional reputation and his embarrassment at being publicly ridiculed for a senseless and wrong-headed ideological campaign against the RMB, will make that silence permanent.

And, if we’re really lucky, he will take Geithner and Schumer with him.



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