The Chinese have long been accused of manipulating their currency to further serve their economic gains. The rest of the world, perhaps understandably, reacts badly to currency manipulation, as it is seen as the equivalent of “cheating” in the game of international economics. China is often reviled by the rest of the world because, unlike many other countries that pay lip service to traditional economic and political conventions, China has a tendency to act without thought to conventions. Even American presidential candidate Mitt Romney accused China of “cheating” at international economics and declared that if he became president, he would label China as the currency manipulators they are (Palmer). However, the economic, political and social impact of currency manipulation, particularly Chinese currency manipulation, is much more complex than Romney expressed in his speech.
Where another country may subtly manipulate their currency into a more favorable bracket, China has a tendency to act unrepentant about its currency manipulation on the global stage. However, because of China’s increasing global political and economic power, the Chinese manipulation of her currency is more significant than ever before. The currency manipulation of the Chinese yuan poses the threat of potential economic instability in Northeast Asia and exacerbates human rights violations domestically.
Dealing with China and the Chinese can be frustrating for individuals, businesses, and even governments that have minimal experience in the region. However, because the region is so powerful both politically and economically, businesses and governments are forced to interact with China regularly. According to a report by the Congressional Research Service:
factors suggest that an appreciation of the RMB to the dollar could benefit some U.S. sectors, but could negatively impact others. The effects of the global economic slowdown have refocused attention on the need to reduce global imbalances (e.g., savings, investment, and trade), especially in regards to China and the United States. Many economists contend that China should take steps to rebalance its economy by lessening its dependence on exports and fixed investment as the main drivers of its economic growth A market-based currency policy is seen as an important factor in achieving this goal. Further RMB appreciation could help promote the development of non- export industries in China, while boosting China’s imports, including from the United States (Morrison, Labonte 2).
Essentially, this report states, the Chinese government keeps the Chinese currency low in comparison to strong currencies like the dollar, the euro, and the pound to ensure that traditionally consumer-driven markets like the United States and Europe are financially motivated to import Chinese goods rather than spending the money to produce them domestically (Morrison, Labonte 2).
This raises the question of how China can manipulate its currency and still maintain integrity and international trust in the Renminbi. The primary method that China uses to keep its currency low is to buy United States debt (Palmer). For many years, China manipulated its currency so that it was connected to the fluctuations in the US dollar. Today, however, China’s entry into the International Monetary Fund (IMF) meant that China was no longer able to overtly tie the value of the Renminbi to the dollar, although its fluctuations are often too close to dollar fluctuations to be considered anomaly.
Some suggest that the Chinese habit of currency manipulation is not a large concern to the United States because the Chinese have tied their currency and their economic success so closely to the US dollar. There may be truth to this statement, and it will be discussed at length later; however, this argument does ignore the fact that China’s actions as a sovereign nation directly affect the nations surrounding her. Both Japan and South Korea are directly impacted by the Chinese manipulation of its currency.
South Korea and China have a tenuous economic and political relationship, partially because of China’s close ties to South Korea’s volatile neighbor, North Korea. According to Palmer, China’s tendency to peg its currency to the US dollar poses significant problems for South Korea. Palmer writes, “Japan and South Korea argue that the artificially cheap yuan forces them to manipulate their own currencies to remain competitive with China” (Palmer). However, Palmer goes on to point out that this is more of a chicken-and-egg problem with regards to South Korea; Korea is a known currency manipulator, and because of this, it is difficult to determine whether Korea’s manipulation of her currency is reactionary or not (Palmer).
South Korea and China share a very similar international economic profile in that they are both export-heavy countries that benefit from having a relatively weak currency in the global market (Gagnon). However, this leads to direct competition between the two nations, as it is not useful in a regional sense for both nations to have weak currencies. As the Chinese yuan becomes stronger, it becomes cheaper for South Korea to export its products to China, but it also becomes more expensive for South Korea to produce items in factories in China. This is problematic for South Korea because, like most other countries in the area and around the world, South Korea relies upon cheap Chinese labor to keep production costs low (Gagnon). Without these low production costs, Korean exports of electronics and other higher-end consumer goods will become more costly to produce; this will cut into profits for Korean businesses in the short term as well as the long term.
The Sino-South-Korean economic relationship is unique because the actions of each country cannot be taken into consideration without considering the global economy. South Korea and China are often in conflict because what would be best for each nation on a regional level is frequently not what is best for that nation on a global level (Ogawa, Iwatsubo). In addition, political pressures within South Korea often mobilize the political leaders of the country against cooperating too readily with the Chinese, due to the Chinese relationship with North Korea (Funke, Rahn).
Japan faces a different, although not unrelated problem when it comes to Chinese currency manipulation. The Japanese market is very different from the South Korean market, although it may be effective to think of the South Korean market as a kind of hybrid between Japan’s market and China’s (Morrison, Labonte 35). Japan is an example of a country with a high rate of saving when it comes to international investment, and does not have the same kind of export-driven economy that South Korea and China have (Morrison, Labonte 35). Instead, Japan has a knowledge-driven economy, with a focus in high-end electronics; electronics that are, by and large, designed in Japan and produced in China (Palmer). Thus, as China’s yuan becomes stronger, Japan faces similar problems with profit loss as South Korea.
Unlike South Korea and China, however, Japan is facing an economic downturn in recent years. During the 1990s, Japan experienced an unprecedented amount of economic growth, excelling in the areas of technological advancement and computer innovation (Staiger, Sykes). However, today, their economic and population growth have both slowed, and profit loss could cause serious harm to the Japanese society. In addition to the long-term economic slowdown, Japan is still recovering from the recent earthquake, tsunami, and nuclear reactor disaster that struck; Japan is a country very close to the edge of economic disaster, and it cannot risk an economic downturn due to profit loss from rising Chinese production costs.
Northeast Asia must be considered as a whole when conducting a discussion about Chinese currency manipulation. The economic ties in the region are complex and varied, and without careful consideration, any economic action taken in any part of the region could have a serious ripple effect throughout the rest of the nations. Forcing the Chinese to strengthen the yuan may be beneficial to the United States economy, although this point is debatable, but it may be beneficial to the United States at the cost of the South Korean’s and Japanese economic stability.
The discussion of the economic situation and currency manipulation in China cannot be had, however, without a discussion about human rights and human rights violations in China, although the two issues seem unrelated at first blush. It is common knowledge that countries around the world have moved their production centers to China where labor is cheap and production turnaround times are fast. The price that companies pay for these benefits, however, is the horrendous treatment of human beings in China.
As long as the yuan is weak, China will be a production and export-driven economy. China has had far too much economic success in this area to ever abandon this economic and financial strategy while it is working for them; they would be silly to do so on the grand scheme of things, because of the amount of economic growth they have witnessed by becoming home to so much of the world’s production. Most of the world and many of the production-driven businesses, on the other hand, will not stop using China’s ready-made production line for as long as it proves profitable for them in the short and long term.
However, using this system is tantamount to supporting a country with a horrendous human rights record. China has very few enforceable labor laws, and Chinese factories regularly use child labor as a way of cutting production costs (Palmer). While this kind of behavior would not be accepted in the West, the United States is more than happy to continue doing business with the Chinese because of the low cost of importing Chinese goods. Chinese human rights abuses are common knowledge, and yet the United States has an extremely laissez-faire attitude towards the abuse and the Chinese human rights policies, or lack thereof.
China’s ability to abuse its population is tied directly to the low cost of the yuan in relation to the other currencies in the west. Because keeping the cost of the yuan low allows China to be an export-driven economy, the Chinese receive positive economic reinforcement for their terrible treatment of individuals living and working in Chinese production lines. While the Chinese government should be held accountable for the human rights abuses that are going on within their country, foreign businesses still bear some responsibility for these abuses as well. The willingness of foreign companies to export cheap labor and exploit the poor in China contributes directly to the problem of human rights abuses within China.
Given all this information about the Chinese yuan and the social, political, and economic situation in Northeast Asia, it is important to note that there are compelling reasons to allow China to continue to peg its currency to the US dollar and to keep its currency’s value relatively low. According to Lazear:
The reality is that the value of China's yuan in terms of dollars is not the major reason why China exports over three times as much to us as we do to them. Its exchange rate is a minor source of weak U.S. job growth If currency movements were the key factor in determining trade patterns, one would expect that exports to the U.S. from China would bear a strong relation to currency movements. They have not (Lazear).
If Beijing were to allow its currency to float in the market, Lazear goes on to postulate, trade relationships would not change significantly, nor would the economic relationships between the United States, China, and Northeast Asia as a whole (Lazear).
China “pegs” its currency to the dollar, and the dollar moves freely; thus, this effect trickles down to the yuan whether China allows the yuan to float freely in the currency market or not (Lazear). Many economic analysts suggest similar things regarding the yuan and its movement-- there are too many factors involved in the Sino-American trade relationship to point out the currency manipulation of the yuan as the major problem in the economic relationship between America and Asia.
The Chinese government does not frequently comment on the accusations that it manipulates its currency, but the evidence does seem to bear out the idea that suddenly halting the manipulation would be a negative thing for China. Chile and Argentina, for example, experienced significant economic growth and opened their economies much too quickly, allowing their currencies to float freely; the economy and GDP quickly took a nosedive in both nations, leaving them struggling to make up for the loss in profit (Preeg).
The Washington Post makes a singularly convincing argument regarding China and the Chinese currency manipulation discussion: “China is not the world’s worst currency manipulator, or even particularly close to it [emphasis original]. Singapore is worse than China. Taiwan is worse than China. These days, Switzerland and Japan are arguably worse than ChinaBut still, it’s hard to take aim at China when so many other countries are getting worse. To the Chinese, it looks like you’re singling them out” (Klein). While China is larger than most of the other nations that are manipulating their currencies, the point remains: if there is to be a standard for currency manipulation around the world, all countries must be held to the same standard. Holding some countries to different standards based on the size of their GDP or the amount of goods that they export on a yearly basis is bad economic policy and will invariably cause tensions between trading partners.
The Chinese can be difficult to deal with diplomatically, especially because of the cultural differences between the Chinese and the western world. Americans particularly can find the Chinese arrogant, but a dislike of diplomatic etiquette is no reason to hold a nation to a different economic standard than nations that are more palatable at the negotiating table. China and her diplomatic tactics may be rough around the edges, but the only way to engage with the Chinese fairly is to expect the same thing from the Chinese as the other nations that are manipulating their currency.
The problem of currency manipulation is multi-faceted, and the most concerning part of currency manipulation in regards to China is the issue of human rights violations. As China manipulates her currency and keeps her ability to export large amounts of goods cheaply growing steadily, the issue of human rights abuses will continue to be a significant social problem within China. Unfortunately, the problem of human rights abuses is not a problem that can be solved through economic interaction alone. It is a systematic social problem that needs to be addressed from within China as well as from without; as long as there is an economic incentive to continue, however, it seems that China has no intention of addressing the issue in any real capacity.
The issue of potential instability in Northeast Asia if China refuses to unpeg the yuan from the dollar seems unfounded, however. There are other political and social issues at play in Northeast Asia that may destabilize the region-- recent nuclear tests by North Korea, for example-- but economically, allowing the Chinese to manipulate their currency seems to be beneficial for Northeast Asia on the whole.
Funke, Michael and J Rahn. "Just How Undervalued is the Chinese Renminbi?." Blackwell Publishing Ltd, (2005):
Gagnon, Joseph E. Combating Widespread Currency Manipulation. Washington D.C.: Peterson Institute for International Economics, 2012. Print.
Klein, Ezra. "Five facts you need to know about China’s currency manipulation." The Washington Post, October 22. 2012: Print.
Lazear, Edward P. "Edward Lazear: Chinese 'Currency Manipulation' Is Not the Problem." The Wall Street Journal, January 7. 2013: Print.
Morrison, Wayne M and Marc Labonte. China’s Currency: An Analysis of the Economic Issues. Washington D.C.: Congressional Research Service, 2011. Print.
Ogawa, Eiji and Kentaro Iwatsubo . "External adjustments and coordinated exchange rate policy in Asia." Journal of Asian Economics, 20. (2009): 225–239. Print.
Palmer, Brian. "If Currency Manipulation Is So Great for Exports, Why Don’t We Do It?." Slate Magazine, October 17. 2012: Print.
Preeg, Ernest H. Exchange Rate Manipulation to Gain Unfair Advantage: The Case Against Japan and China. Institute for International Economics, 2003. Print.
Staiger, Robert W and Alan O Sykes. "Currency Manipulation and World Trade." National Bureau of Economic Research, (2008):