Free-trade: The Implications of Chinese Currency Manipulation
Question: What are the economic implications of China’s recent history of devaluing the yuan? Specifically, what are the negative implications to major trading partners like Japan and the United States? Are there negative downstream impacts?
The Peoples Republic of China (PROC) is not playing fair in the game of global trade, and they are cheating other countries, companies, and taxpayers by manipulating the Yuan. With China’s enormous economic scale and its quasi-centrally planned economy, the PROC today has unprecedented leverage over global trade. This power should frighten central banks and lawmakers alike. Moreover, the Peoples Bank of China’s (PBOC) monetary policy affords those in power the discretion to assert centrally planned economic fundamentals that influence global output.
The Peoples Bank of China (PBOC) is manipulating markets and circumventing trade doctrine by leveraging the country’s massive scale to set artificial pricing for the Yuan Renminbi (RMB). Given the PBOC’s history, one can draw parallels in the implementation of China’s recent monetary policy with their recent shift to a market-oriented economic system.
In both scenarios, China exerts passive policies to influence economic output — with economic output being currency prices and the allocation of scarce recourses. Capital Economics Senior China Economist Julian Evans Pritchard summarizes China’s economic malfeasance in:
(China) “Effectively weaponized the exchange rate, even if it is not proactively weakening the currency with direct intervention.” [sic]
Tariffs are regulated, and currency — in regards to China — is not. The RMB is not a freely traded currency within the floating exchange rate (FOREX) and the government, more often than not, manipulates their currency to flout established trading doctrine. The PBOC uses a traditional fixed exchange rate, where their currencies valuation reflects its trading partners’ currencies. Rather than allowing the market to determine currency prices, as done in FOREX transactions, China pegs ‘fixes’ the value of the RMB to a basket of other currencies. The PBOC’s currency manipulation is embodied within the idiosyncrasies one finds in currency valuation between a floating and a traditional exchange rate. With China being a net exporter, when in effect, China’s Managed Exchange system incurs destabilizing consequences for the Greenback.
Economists postulate the PBOC’s monetary devaluation, which included interest rate cuts and further scrutinization of financial markets, as a part of larger agenda: the PROC’s shift from a centrally planned market to a market-oriented economy. And others contend the PBOC’s monetary devaluation is vested in China’s determination to be included in the International Monetary Fund’s (IMF) SDR. Given the PROC’s globalist agenda and history of economic harassment, the PBOC’s currency manipulation leaves little room for conjecture. The SDR was created in 1969 to supplement distressed countries- particularly when facing a dollar shortage. A dollar shortage is most likely to occur when a country’s imports exceed its imports and the government lacks sufficient means for remittance (remittance being usually gold or USD). The IMF is able t to supplement a nation’s liquidity crunch or exchange rate because the SDR is an international reserve asset with functions similar to currency. Essentially, the IMF provides distressed nations with liquidity from the SDR fund.
Many economists postulate the currency manipulation as smaller part of China’s larger ambitions — for economic globalization. On the other hand, others see China’s currency manipulation as a response to tariffs imposed on Chinese export. The PBOC can get away with tariff-like results without offending trade agreements by strategizing monetary puffery.
A cheaper Chinese currency helps Beijing counterpoise the economic implications bestowed by American tariffs. Additionally, the PBOC wants to ensure China’s exports cost less for American consumers than other imports or domestically manufactured products. This economic ploy fosters an unfair competitive advantage where Chinese imports are favored over other products, domestically produced or imported. Beijing’s economic harassment comes with an assortment of implications, such as economic deadweight loss. An economic deadweight occurs when there a market is rife with inefficiencies. Deadweight loss is a cost to society when supply and demand are out of equilibrium. Regarding the Chinese currency manipulation, the economic deadweight is subsidized by import tariffs and the American taxpayer. A less expensive Yuan makes Chinese exports more competitive; IE, it is cheaper to buy their goods with foreign currency. Low-value currency- a lot like tariffs. If the US dollar loses half the value, the BMW will be more expensive to purchase, making Chinese imports perspective. (Similar function of tariffs.)
Though China’s economic scale and currency manipulation confer unfair competition, messing with free markets befalls many costs. The Chinese government has created a unique market for the Yuan- one of which natural economic forces, free from Beijing’s control, take effect. For instance, by charging a significant amount less their money, non-Chinese governments, banks, and companies end up maintaining large cash reserves. These cash reserves can be used to facilitate transactions in substitute markets, such as FOREX. The imposition to have large amounts of money, coupled with China’s currency manipulation and trade wars- naturally -impedes China’s globalist ambitions.