China bashing has long been a staple of US presidential campaigns. But even in silly season, it is difficult to explain the American, and particularly, Mitt Romney’s fixation with China’s currency, the RMB. He has repeatedly said that “on day one” of his presidency he will declare China a currency manipulator. There are indeed, big economic issues to confront China on. Unfortunately currency is probably not one of them – and certainly not at the top of the list. For starters, there is intellectual property rights; cyber theft of proprietary industrial data; and especially, state bank subsidized loans to favored Chinese companies, especially in the critical solar, wind, and telecommunications sectors.
RMB Wrong Target
By many estimates, adjusted for inflation, the RMB has appreciated nearly 40 percent since 2005, when China ended the peg of the RMB to the dollar. There is no doubt China is determined to manage any adjustments to the RMB and interest rates (which is why it will be a long time before the RMB will become an international reserve currency). Then again, it can also be argued the Fed’s rounds of “quantitative easing” have had some impact on the value of the dollar.
Regardless, Beijing’s concerns about inflation— and the need to rebalance its economy away from exports and toward domestic consumption —provide ample reason why the RMB will continue to appreciate. It has appreciated by roughly 5 percent a year since 2005. It may still be undervalued, but it is unlikely to be a major factor in the US-China bilateral economic relationship.
Why? For one thing, despite the RMB revaluation, the US trade deficit has continued to rise. It has jumped up from $203 billion in 2005 to $295 billion in 2011— even as US exports to China more than doubled during that period. That would suggest that an undervalued RMB is not the principal cause of the trade imbalance.
So why the preoccupation with the value of the RMB as the tool to redress US economic grievances against China? Perhaps it is convenient political shorthand to show US resolve. If not, than it reflects a poor understanding of China and Chinese behavior.
It would make a lot more sense to keep the US emphasis on Chinese policies that flaunt or bend the WTO rules they signed on to in 2001. State-owned banks, for example, lavish nearly free money to help Chinese firms corner the global market in green technology and IT. Another industrial policy tactic often employed to keep foreign competitors at bay is using regulations such as domestic mobile phone and wireless network standards to give Chinese firms domination of its domestic market.
The good news is that China’s incoming new leadership is well aware that its success or failure over the next decade will be measured by the extent to which they implement policies to move beyond their export-growth, state-centered development model and rebalance their economy to be more consumer-driven and market-centric. Failure to do so risks falling into the middle income trap –as wages rise, they are no longer unable to compete with low wage exporters, yet unable to compete with advanced economies in higher-value products. Retooling China’s economy will require a host of policy changes and reforms likely to move China away from many of its neo-mercantilist practices.
It would be wise to keep the focus of US economic policies toward China on issues that could be a “win-win,” pressuring China to move in the direction it needs to advance towards for its own reasons. Don’t expect that to happen in Silly Season. But whoever is in the White House after January 20th might do well to review priorities in regard to pressure points on Chinese economic policies.
Robert A. Manning is a senior fellow at the Atlantic Council. He has served as senior strategist, DNI National Counterproliferation Center until June 2012 , on the National Intelligence Council, and on the State Department Policy Planning staff (2005-08).