Currency wars: US v China

飞雪寒冰

Beijing was asking for it. On Friday a central bank official invited the US to refrain from “politicising” China's currency policy. On Sunday, closing the annual meeting of lawmakers, Premier Wen did little else, with a series of pointed allusions to the “Three Ts” dominating the two nations' relationship: Taiwan, Tibet and the trade surplus. Still, the US retaliation – 130 Congressmen urging President Obama to label China a currency manipulator, for the first time in 16 years – is a rush of blood to the head. Signatories must realise that the more pressure you put on China to do anything, the less likely it is to do it.

飞雪寒冰

America's exasperation is understandable. The International Monetary Fund's Articles of Agreement prohibit countries from manipulating their currency for the purpose of gaining an unfair trade advantage, but the IMF has no powers to force China, which does not borrow from it, to change anything. Trade sanctions, meanwhile, could be justified only if the US can persuade the World Trade Organisation that currency manipulation satisfies its narrow definition of a “subsidy,” and that such subsidies merit countervailing duties – a very difficult task.

飞雪寒冰

China's pledge last week to “further push ahead with reform of the renminbi exchange rate formation” was its strongest commitment to flexibility since the new dollar peg was put in place in July 2008. It may imply, notes Citic Securities, a desire to adopt a “basket, band and crawl” policy, similar to Singapore's, where the currency is managed against an undisclosed group of currencies, floating within a set band, to achieve a targeted appreciation or depreciation within a specified timeframe. If so, great. Meantime, the Obama administration should leave it to Brazil, Russia and other emerging nations – where China's shipments should overtake those to the three big developed markets this year, on CICC estimates – to make the argument for revaluation in public. If the US really wants a stronger renminbi, the best advice is to shut up, and let it happen.