After more than a decade of classifying China as a currency manipulator, the International Monetary Fund announced last year that China's currency was fairly valued and moving toward an appropriate equilibrium with other currencies. Indeed, the renminbi steadily rose in value from 2005 to 2014, and more recently China has actually been working to keep the RMB from declining. So, after decades of accusations that it was serially distorting the global marketplace, is China finally vindicated?
Veteran journalist, author, and scholar Richard Katz seems to think so. In fact, in both the Wall Street Journal and in The International Economy, Katz interprets the IMF's announcement as proof not just that the RMB is fairly valued, but also that China did not manipulate the RMB over the past ten years. To him, talk of currency manipulation is a handy way of portraying China as a "scapegoat of America's lost jobs" when in fact the real cause is U.S. productivity growth allowing fewer workers to produce more goods. He is wrong on both counts.
First, the Chinese government still exerts control over the RMB. In 2005, China stopped pegging its currency to the U.S. dollar, and from 2005 to 2014, as Katz states, "the RMB has appreciated 33 percent against the dollar." But over the same period, China's foreign currency reserves grew 380 percent, from $830 billion to $3.9 trillion. This growth, a reflection of China's consistent trade surpluses, suggests that the RMB is in fact still overvalued, as the natural response to persistent trade surpluses is an increasing currency value. And while China has let its foreign reserves fall to around $3.3 trillion since 2014, this reduction was sparked not by a desire to strengthen the RMB, but to keep the RMB from falling too low as China enters a rough patch of economic uncertainty. In fact, since 2014, the RMB has fallen in value by about 3 percent as the government tries to prop up a troubled economy through even more exports.
Moreover, China has long buttressed its currency manipulation with industrial export subsidies to keep prices low. Indeed, China has the world's largest export subsidies, even on a per capita basis, which distorts international trade in many industries, including steel, wind turbines, solar cells, glass, paper, and auto parts. These subsidies contribute substantially to Chinese trade surpluses and to global overcapacity in these sectors.
So the truth is that China still is a currency...