Currency Manipulation

1
Currency Manipulation
Group 4 Anthony Martinez Brent Robbins Tipnandha
Terwanij Ahmed Attoure

• Does it Hurt the U.S. Economy?

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The Topic

• Manipulation of currency values by China and
  other developing countries hurts the U.S.
  economy.
• The Groups Stance
• Currency manipulation does not hurt the U.S.
  economy.

3
What constitutes exchange rate manipulation?

• 1) Under the IMF rules, countries can fix,
  float, or adopt a wide array of intermediate
  exchange rate regimes. Also, countries are
  permitted to intervene in exchange markets and
  are expected to do so when intervention is
  necessary to counter disorderly market
  conditions. But countries are not permitted to
  engage in protracted, large-scale intervention in
  one direction in the exchange market.

4
Fact

• China and other developing countries are seeking
  to maintain, via intervention, the wrong
  exchange rate. In the case of the Chinese RMB,
  there has been prolonged, large-scale exchange
  market intervention in one direction for the
  better part of two years.

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What constitutes exchange rate manipulation?

• 2)Just because a country maintains a fixed
  nominal exchange rate over an extended period of
  time does not mean that it cannot be manipulating
  its exchange rate. What counts is how a countrys
  real (inflation-adjusted) exchange rate has been
  behaving against the backdrop of its overall
  balance-of-payments position.

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Fact

• -Chinas nominal exchange rate has been fixed at
  8.3 RMB/US dollar over the past eight years.
• - US dollar has been falling on a real,
  trade-weighted basis over the past 2 years.
• -The real, trade-weighted value of the RMB has
  been falling along with itand this at a time
  when China has been running surpluses on both the
  CA and KA and has been experiencing very large
  increases in international reserves.
• -A balance-of-payments surplus and large
  reserve accumulation call for an appreciating
  real exchange ratenot a depreciating one, and
  lack of movement of the nominal exchange rate in
  such circumstances hinders effective adjustment.

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The History

• The story begins with the US' steadily worsening
  current account deficit, which is now worth more
  than 5 percent of GDP, while countries in Asia
  and Europe enjoy sizable trade surpluses.
• History suggests that any country with a deficit
  as large as this would sooner or later suffer a
  currency crisis or a sharp devaluation.

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The History

• The US dollar began to devalue early this year
  against a basket of currencies.
• The devaluation is likely to continue in the
  future, narrowing the US trade deficit.
• However, the robust intervention by Asian
  central banks to support the dollar, with Japan
  being the best example, have prevented the dollar
  from depreciating, leaving the international
  economy unbalanced.

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The History

• This is why the G7 called for more flexible Asian
  exchange rates, or more bluntly, to allow Asian
  currencies to appreciate against the US dollar.

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The Case Study of China

• China, with its currency pegged to the dollar and
  rapidly growing foreign exchange reserves, was
  obviously one target of this appeal.
• However, the real pressure on the renminbi has
  come from the US as it runs a large and
  fast-growing trade deficit with China that
  exceeded US100 billion, or nearly one-fifth of
  US global current account deficit.

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The Case Study of China

• Worse still, this occurred in an environment of a
  jobless recovery in the US economy.
• Already a New York Democratic senator has
  proposed a draft resolution in Congress calling
  for the imposition of a 27.5 percent import
  tariff on Chinese imports.

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China and U.S. Trade

• Chinese exports grew eightfold between 1990 and
  2003.
• Foreign companies currently account for about 50
  of Chinas exports and 60 of its imports many
  of them are American companies.

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Chinas Importance to U.S. Trade

• Substantial purchasers of U.S. debt
• China is a major consumer of foreign goods
• Beneficial to American consumers

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Substantial Purchasers of U.S. Assets

• During the past year and a half, China purchased
  more than 100 billion in U.S. government
  securities.
• Obtained 345 billion of reserves in cash and
  U.S. securities-much of that invested heavily in
  bonds, which is helping finance the trade and
  budget deficits.
• Nurturing Americas economic expansion by helping
  U.S. interest rates stay low.
• Any move from China to sell bonds and reduce
  reserves would drive up U.S. interest rates.

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China- A Major Importer of U.S. Goods

• Americas fastest-growing export market,
  expanding at an annual rate of about 20.
• U.S. companies sell 20 billion worth of goods to
  China.
• Since 1995, Chinas imports have grown twice as
  fast as U.S. imports.
• Sales to China will account for
• 75 of the increase in Japans exports
• 40 of the rise in Koreas exports
• 99 of the increase in Taiwans
• 25 increase in U.S. exports

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China- A major Importer of U.S. Goods

• Chinas cheap labor cannot produce cutting edge
  technology such as high speed computers,
  pharmaceutical products, up-to-date communication
  equipment, nuclear energy facilities, and
  aircraft.
• Demands these imports and has financial ability
  to pay.

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Beneficial to American Consumers

• Since 1997, U.S. consumers have saved about 100
  billion a year in import bills as lower-priced
  goods, primarily from China.
• If imports from these countries are cut, U.S.
  consumers will pay considerably higher prices for
  items such as shoes, toys, etc.

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Currency Manipulation causing U.S. Manufacturing
jobs to drop?

• Not displacing American workers, but creating
  alternative suppliers around the world.
• 60 of the goods imported from China, namely
  toys, shoes, and garments, are no longer produced
  in the U.S.
• 15 to 20 years ago these imports were mainly
  produced in Korea, Taiwan, and Hong Kong-10 yrs
  ago it was Mexico.
• China is a scapegoat for job losses-if the U.S.
  stops importing these goods from China, these
  jobs would not return to the U.S.
• Presidents 2004 budget cut funding for all but 2
  Manufacturing Extension Partnership (MEP)
  programs. Also slashed funding for the Advanced
  Technology Program (ATP) from 107 million to 27
  million.

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U.S. Should Not Push China Towards Revaluation

• Greenspan-if China allowed currency to float, it
  would cut exports, but would be replaced rather
  than helping U.S. textiles.
• It could trigger a banking crisis-Chinese banks
  burdened by bad loans.
• Affects U.S. consumer spending and financial
  sector.

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Manipulation Not Hurting U.S.

• Americans spending more than saving due to low
  interest rates-this is a major cause of the large
  deficit.
• Yuan pegged to dollar has no bearing on the U.S.
  balance of payments. China earns more than they
  spend.
• Fixed exchange rate can be a source of deficit or
  surplus in foreign exchange account, but not a
  source in current account.
• Countries have comparative advantage

22
Manipulation of currency values by China and
other developing countries does not hurt the U.S
economy

• Simply stated, China is devaluing its currency to
  be more competitive in the export of cheap goods
• Thus, china is selling us its manufactured goods
  at a discount.
• The loss is therefore absorbed by china not the
  U.S.
• US consumers are the winners.

23
Manipulation of currency values by China and
other developing countries does not hurt the U.S
economy

• From an economics view, stating that China is
  hurting U.S. manufacturing sector is misleading.
• China is competing with U.S. manufacturing, and
  as we all know, competition is beneficial to both
  countries.
• The result of the competition is cheaper prices
  for the consumer and greater variety of choices.

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Manipulation of currency values by China and
other developing countries does not hurt the U.S.
economy

• Why China is not hurting the US economy?
• 1. The US economy biggest revenue is in the
  technological service sector.
• 2. US manufacturing of cheap good was already in
  decline.
• US was competing with others developing countries
  in the manufacturing of cheap goods.

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Manipulation of currency values by China and
other developing countries does not hurt the U.S.
economy

• For every one thousand jobs lost in the
  manufacturing sector, millions of people gain
  from lower priced purchases.
• The manufacturing sector is forced to be more
  innovative in order to survive.

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Manipulation of currency values by China and
other developing countries does not hurt the U.S.
economy

• An international obsession with the Chinese
  currency appears to be deflating. This passion
  began with Japanese accusations that Chinas
  undervalued currency was causing its deflation,
  continued with Europeans blaming it for slow
  European Union growth, this hit full power with a
  vast U.S. National Association of Manufacturers
  campaign blaming it for job losses.
• Then reality set inwell, a little bit. Last
  November, the Japanese, who started the whole
  thing, refused to back U.S. President George W.
  Bushs pressure on China. On October 30, the Bush
  administration admitted that China was not
  violating rules against currency manipulation.
  The Federal Reserve Bank has, likewise, published
  research showing that China is not primarily
  responsible for U.S. job losses.
• Now, lets look at the 12 myths that caused these
  false impressions.

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Manipulation of currency values by China and
other developing countries does not hurt the U.S.
economy

• Myth one
• China established its fixed-rate system to
  undervalue its currency in order to promote
  exports, thus infringing international
  prohibitions against manipulating the currency in
  one direction to create a disguised export
  subsidy. In reality, when China established its
  fixed-rate system in 1994, it overvalued the
  currency, compared with market rates from 1994
  through to early 2003, as shown by black-market
  rates and capital flight. From 1997 to 1999, U.S.
  and other world leaders praised China for
  resisting market pressures to devalue. Thus,
  Chinas fixed rate has overvalued the currency
  for more than seven years, hurting exports, and
  undervalued it for less than two years.

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Manipulation of currency values by China and
other developing countries does not hurt the U.S.
economy

• Myth two
• The Chinese currency is a principal cause of
  the loss of 2.7 million manufacturing jobs in the
  U.S. As Charles Wolf, of The RAND Corporation,
  has pointed out, when productivity grows faster
  than gross domestic product, and during
  recessions, jobs decline. The difference between
  productivity and growth is such a powerful cause
  of job losses, without Chinese influence, that
  there is a mystery why more jobs have not been
  lost. Many assume that, as manufacturing jobs in
  the U.S. decline, manufacturing jobs in China
  rise. In fact, rising productivity leading to the
  loss of manufacturing jobs is much more powerful
  in China than in the U.S. Depending on which
  figures one uses, the decline of manufacturing
  jobs in China may be more than 10 times the
  American loss. All calculations show that Chinese
  manufacturing job losses are proportionately more
  severe than in the U.S.

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Manipulation of currency values by China and
other developing countries does not hurt the U.S.
economy

• Myth three
• The rise of the service sector at the expense of
  the manufacturing sector means that Americans are
  being forced out of high-paying manufacturing
  jobs and into low-paying service jobs. The
  reality is that while some workers lose steel
  jobs and move to McDonalds, the larger trend is
  higher-paying service-sector jobs squeezing out
  lower-paid manufacturing jobs.
• Myth four
• Restricting imports from China would reduce U.S.
  unemployment. In reality, over recent decades,
  more protectionist economies like France and
  Germany have experienced a negligible increase in
  total jobs, while the more open U.S. has
  experienced a huge rise in total jobs and
  achieved unemployment levels about half those of
  France and Germany. Restricting imports would
  make Americas economy behave like that of France.

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Manipulation of currency values by China and
other developing countries does not hurt the U.S.
economy

• Myth five
• America faces a manufacturing crisis, caused by
  competition from China. The reality is that U.S.
  manufacturing production has soared, decade after
  decade. Imports from China equal only 5 per cent
  of U.S. manufacturing.
• Myth sixth
• Due to its undervalued currency, China is taking
  over manufacturing of almost everything. In
  reality, Chinas successes have been concentrated
  in low-end manufacturing. Where China has tried
  to move quickly into higher-level exports, as in
  Shanghai, huge investments have resulted in
  slower export growth than elsewhere in China.
  About 83 per cent of Chinese technology exports
  are the exports of foreign companies, and the
  bulk of the profits typically go to those
  companies. Chinas hi-tech imports greatly exceed
  its hi-tech exports

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Manipulation of currency values by China and
other developing countries does not hurt the U.S.
economy

• Myth seven
• If Chinas currency were revalued by, say, 20
  per cent, there would be a dramatic decline of
  its exports to the U.S. In reality, the impact
  would be quite limited because most Chinese
  exports rely heavily on imported parts. While
  international financial institutions have not
  completed research on the import content of
  Chinese exports, their best guess is that the
  average Chinese export is made up of 75 per cent
  imported parts. Therefore, a 20 per cent
  revaluation of Chinas currency would result only
  in a trivial 5 per cent rise in export prices.
• Myth eight
• China runs a massive surplus, which shows its
  currency is undervalued. In reality, while China
  runs a large trade surplus with the U.S., its
  global current-account surplus is quite small and
  may be vanishing completely.

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Manipulation of currency values by China and
other developing countries does not hurt the U.S.
economy

• Myth nine
• Like old Japan, Chinas superior growth comes
  from pushing exports. In reality, in recent
  years, net exports have contributed negligibly,
  and in some years negatively, to Chinas growth.
  Domestic housing, cars, retail sales and
  infrastructure investments keep the economy
  booming.
• Myth 10
• Because of its undervalued currency, China is
  exporting deflation to the worlda principal
  Japanese complaint. In reality, because China
  kept its currency overvalued during and
  immediately after the Asian financial crisis,
  when its competitors devalued by huge amounts
  (for example, Thailand and the Philippines by 50
  per cent), China experienced deflationary
  pressure from abroad, worsening its problems, as
  it shifted 60 million people out of state
  enterprises. Cheap Chinese goods could not have
  affected Japanese deflation by more than 0.1 to
  0.2 percentage points out of 3.5 points last year.

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Manipulation of currency values by China and
other developing countries does not hurt the U.S.
economy

• Myth 11
• Economists agree that Chinas currency is
  overvalued. In reality, the currency is under
  upward pressure as long as capital is allowed to
  flow in, but Chinese are mostly prohibited from
  sending money out. If all controls were freed, as
  foreign critics demand, some of the almost US 2
  trillion now deposited in insolvent Chinese banks
  and earning negligible interest would flow
  overseas, leading to devaluation. The message to
  beleaguered manufacturers is be careful what you
  wish for.
• Myth 12
• Proposed remedies and sanctions have been
  carefully designed to protect U.S. jobs. In
  reality, if implemented, they would mostly just
  shift jobs from China to other Third World
  countries at the expense of U.S. consumers. Most
  notably, at the top of the list of proposed
  remedies has been limits on surging Chinese bra
  imports. This would be a triumph for Latin
  American lobbyists, but, according to one of the
  largest U.S. sellers of bras, the US does not
  make bras and, therefore, has no jobs at stake.

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Conclusions

• China, and other large foreign countries,
  manipulation of currency values helps the U.S.
  support its growth in the economy by providing a
  cheap creator of goods and a large importer of
  foreign goods. In the end, there intervention
  helps consumers most.
• China should be allowed to continue currency
  manipulation so long as the U.S. trade balance
  does not continue to drop further and further
  into deficit.

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Thank You for Your Time!

• Any Questions?