Dear Mr. Wenzel,From the piece:
My op-ed in the March 30 edition of the Wall Street Journal, co-authored with Emma Smith, looks at presidential campaign charges that China is engaged in “currency manipulation” to boost net exports. We show that the aims of China’s pegged exchange rate regime have varied over the past two decades, and have not always been mercantilist. In recent months, with capital flowing out of China at a prodigious rate, its interventions have been to keep its currency up—not down. Launching a trade war with China over currency management, as Donald Trump and Bernie Sanders intend, would therefore be nonsensical—as well as damaging to U.S. interests.
I hope you find the piece of interest.
All best regards,
Presidential candidates Donald Trump and Bernie Sanders, with a phalanx of lawmakers behind them, continue to bash China as a “currency manipulator.” Both men claim that Beijing is engaged in a permanent strategy to keep the yuan weak and prop up its trade surplus. But the reality was never that simple, and the charge is ludicrous at present.
Beijing began pegging its currency to the U.S. dollar over two decades ago, as part of its plan to integrate the Chinese economy into a global marketplace in which transactions were overwhelmingly priced in dollars. It stuck by this strategy even during the height of the Asian financial crisis, in 1998, when much of the world was expecting it to devalue. This earned it great praise from the U.S. government. “China, by maintaining its exchange rate policy,” pronounced President Clinton’s Treasury Secretary Robert Rubin, “has been an important island of stability in a turbulent region.”
But once market pressures reversed, and capital began flowing into China, U.S. lawmakers suddenly decided that currency stability was bad: They wanted the yuan to rise, while China continued to keep it fixed....
Fast forward to 2016, and capital is now flowing out of China at a prodigious rate. In an effort to slow the resulting fall in its currency, China’s central bank has been selling vast amounts of dollars and buying up yuan. At $3.2 trillion, China’s reserves still seem enormous. But they are down $790 billion from their 2014 peak, and $325 billion in the past four months.
At this pace of decline, China’s reserves will fall to $2.8 trillion in July. To put this in perspective, China, using the International Monetary Fund’s framework for reserve-adequacy measurement, needs to hold between $2.8 trillion and $4.2 trillion in reserves to safeguard against a balance-of-payments crisis. Once reserves fall below an adequate precautionary level, China is at risk of being unable to pay for essential imports or its dollar debts. The IMF estimate could be overly cautious, given China’s relatively low level of external debt, but it could also be too sanguine in that some significant portion of China’s reserves, estimated to be around a third, is believed to be tied up in nonliquid assets—and unavailable in a crisis. These include China’s capital commitment to the new Asian Infrastructure Investment Bank.
So what can China do to stanch the rapid decline in reserves?
The country has for years been pursuing what has been called the “Impossible Trinity”: controlling interest and exchange rates while leaving the capital account significantly open....
That China has no good options, and only a choice among painful ones, reflects the underlying structural problem in the Chinese economy—one that will take many years to fix... and a willingness by the Chinese government to allow businesses to die so that more promising ones may live.