Bursting the Currency Hawks' Bubble

The Wall Street Journal yesterday had a great article which singlehandledly exposes the silliness of currency hawks' argument that threatening China with retaliatory tariffs will somehow "pressure" the Chinese into appreciating the Yuan (and, of course, magically saving the US economy).  In fact, China's latest response to the angry rants of certain US senators and GOP presidential candidates should make it abundantly clear to everyone that the Chinese government is motivated entirely by self-interest (and self-preservation) rather than what some good-haired politician is telling folks 2000 miles away:

China said that rapid yuan appreciation in the near term is out of the question as it would harm China's economic growth, in one of the strongest responses yet to U.S. pressure for a faster rise in the currency.

The comments by a spokeswoman for the Ministry of Foreign Affairs on Wednesday reflect China's growing anxiety as its domestic economy slows and demand for its exports is threatened by economic stagnation in Europe and the U.S.... 

"In the short term, pushing for rapid yuan appreciation is not possible. If Chinese economic growth slows, it will reduce global aggregate demand," Ms. Jiang said.

In public comments about the issue, Chinese officials have stressed that yuan reform will be gradual, but haven't explicitly said that rapid appreciation is off the table.
The WSJ article also notes what some of us have been saying for a while: due to the Chinese currency and other economic policies, the economy could be in big trouble if the government doesn't figure out a way to appreciate their currency and curb inflation, while maintaining economic growth (and employment):

The comments also come after Chinese Premier Wen Jiabao on Tuesday called for China to "fine-tune" its economic policies to support growth, adding to speculation that China may at some point shift away from its focus on curbing inflation.

Yuan appreciation could be one way to offset inflation, but a return to a growth focus could lead to Beijing considering slowing the trend as a way to help China's exporters. 

China now faces a dilemma, as some economists have begun arguing that the country's situation justifies slower yuan appreciation, while external pressure on China to keep the yuan rising is likely to remain intense....

Standard Chartered economist Stephen Green projected Tuesday that the yuan's appreciation against the dollar will slow to 3% to 4% in 2012 from 5.5% in 2011, due to China's slowing economic growth.....

China has other levers that it is already pulling to fine-tune its economic policy beyond the yuan's value. Measures are being rolled out to support smaller companies, which have been starved of access to credit. And Beijing may move to lift restrictions on bank lending, analysts say.

Stronger stimulus measures like interest rate cuts don't look likely, with inflation still alarmingly elevated. On Tuesday, Mr. Wen reiterated that maintaining price stability remains the government's top priority.

Meanwhile, China's currency has actually appreciated quite a bit over the last few years, including in 2010-2011:

Since 2005, the yuan has risen around 30% against the U.S. dollar, and it is now "close to a reasonable equilibrium level," Foreign Ministry spokeswoman Jiang Yu said at a regular press briefing.... 

On Wednesday, Bank of America-Merrill Lynch economist Lu Ting said that due to recent dollar strength, the yuan has actually appreciated by 4.1% against a broader basket of currencies since the end of July...

The dollar late in the Asia trading day Wednesday was at 6.3533 from 6.3604 late Tuesday, with the yuan higher against the dollar for the fourth straight trading day....

The yuan has risen 3.7% against the U.S. currency so far this year and 7.4% since June 2010, when China essentially unpegged its currency from the dollar.
And yet, despite all of these facts...

Political pressure on China from abroad to allow faster yuan appreciation is unlikely to abate in the near future. A U.S. Senate bill that would penalize China for its currency policies may be stalled in the House of Representatives, but the U.S. presidential elections in November 2012 are likely to keep the issue in the headlines for at least the next year, with Republican presidential hopeful Mitt Romney already pledging to declare China a currency manipulator.  
Will they ever learn?This feed originates at the personal blog of Scott Lincicome (http://lincicome.blogspot.com).