Remember The Whole "China Is A Currency Manipulator" Brouhaha? It's Back

Tyler Durden's picture

One of the parallel news lines that was buried in last week's oil spill, was the pick up in Chinese currency manipulation rhetoric (with the Treasury now two months behind its April 15 deadline on determining if China is an FX manipulator, indicating just how terrified of an adverse response Geithner truly is), particularly that by Chuck Shumer, whose most recent proposal is not to vote China off the face of the manipulative planet (yet all China does is peg its currency to the dollar, which is kept at its level by US Fed monetary policy - does that mean that the Fed is a currency manipulator too?), but to effectively change the entire concept of "currency manipulation" and rebrand it to "currency misalignment" thus reducing the risk of political fallout. Couple this with several complaints received by the Dept of Commerce from domestic manufacturers alleging Chinese subsidies, and the Chinese FX relations, now that global liquidity is assumed to be once again "under control",  may once again deteriorate rapidly. Attached is a succinct summary from Goldman's Alec Phillips which present the key issues in the upcoming weeks over the China currency manipulation situation.

  • Rhetoric out of Washington regarding US-China trade relations is likely to ramp up over the next few weeks. The most important issue is the possibility of Senate passage of Senator Schumer’s proposal to apply trade remedies as a response to undervalued currencies among trading partners.  A possible decision by the US Department of Commerce on whether to consider currency undervaluation a trade subsidy under US law and the Treasury’s semiannual foreign exchange report also look likely to come up this summer.
  • This latest round comes at a more sensitive time and could be more significant than previous flare-ups in US-China trade relations. As we’ve noted in the past, trade tensions tend to rise along with the unemployment rate, but so far the use of trade remedies—antidumping and countervailing duties—has barely risen from the cycle low reached in 2006.  While most market participants have dismissed the rhetoric of the last few years as inconsequential, rising tensions combined with elevated unemployment could be a more dangerous combination. 

Rhetoric out of Washington signals rising trade tensions. While ultimatums on trade policy out of Congress are nothing new—lawmakers have been focused for several years on China’s foreign exchange policy, which many US manufacturers, labor unions, and others see as a source of unfair advantage—the latest round takes place in a more sensitive environment. The last heated debate over US-China trade (and specifically foreign exchange) that took place in 2005 and 2007, a fairly benign environment with reasonably strong growth and relatively low unemployment.  As rhetoric heats up once again, the extremely high level of unemployment and underemployment in the US labor market could make lawmakers even more sensitive than usual to claims that China’s foreign exchange policies are impeding US economic recovery.

The exhibit shows the annual unemployment rate against the customs value of imports subject to antidumping and countervailing duties approved in that year. Although these trade remedies are fairly routine—dozens of petitions are filed each year—their frequency provides an easy way to track the ebb and flow of trade policy shifts. Not surprisingly, US trade remedies have increased significantly when the unemployment rate was rising, signifying an increasingly protectionist stance during those periods.

What is surprising, however, is that there has not been a more significant reaction thus far in this cycle.  Given the prolonged policy reaction over the last two years—first through financial stabilization, then fiscal stimulus, and now financial reform legislation—lawmakers may have simply focused their attention on other issues this time around.  That said, if the unemployment rate remains essentially unchanged over the next year as we expect, it is very possible that policymakers may finally react, albeit after a longer than usual delay.

US Unemployment and Trade Remedy Actions

The main source of friction is China’s foreign exchange policy, as it has been for the last few years.  Most US policymakers appear to believe that the Renminbi is undervalued against the dollar, particularly in Congress. After a respite during the financial and housing crisis in 2008-2009, rhetoric has begun to heat up, with several potential developments over the next few weeks:

  1. Sen. Schumer’s legislation—a vote in the next two weeks?  The primary focus is Senator Schumer’s (D-NY) legislation, which is similar to proposals introduced in previous years. His most recent proposal, introduced in March, would (1) require the Treasury to report semiannually on currency “misalignment” rather than “manipulation,” which makes it more likely that the Treasury would find a currency misaligned but potentially lowers the political fallout from doing so; (2) incorporate misalignment into antidumping duty calculations; (3) prohibit US government purchases of imports from that country, unless the country is party to the Government Procurement Agreement (GPA, see below); (4) require the Department of Commerce to initiate investigations into currency misalignment as a subsidy if a domestic company requests it; (5) request consultations through the IMF, and (6) require the administration to bring a complaint in the WTO if the trading partner hasn’t adopted policies to remedy the misalignment.  Senator Schumer may have some cooperation among Democratic leadership in bringing this bill to a vote in the Senate, most likely as an amendment to an upcoming small business package that could be considered next week. if the bill does come up for a vote it is likely to pass in the Senate, though whether it becomes law or not will depend on House passage. For his part, House Ways and Means Chairman Sander Levin (D-MI) has not been as strong an advocate of legislative intervention in US-China trade relations.
  2. The Commerce Dept.’s decision on currency-related trade remedies.  The US Department of Commerce has received several complaints from domestic manufacturers alleging that imports from China are subsidized by the undervaluation of the Renminbi against the dollar. Thus far, Commerce has declined to initiate investigations of this aspect of these cases, due to the “unique nature” of currency undervaluation as a trade subsidy and the methodological issues involved, but has come under increased pressure from members of Congress to make a determination on the issue. A determination that currency undervaluation is a countervailable subsidy could take some pressure off of the Treasury’s upcoming foreign exchange report (see below), but only temporarily.
  3. Treasury semi-annual report on foreign exchange.  The report, in which the Treasury must declare whether any country has manipulated its currency, is unlikely to be published until after the upcoming G-20 leaders meeting on June 26-27, more than two months past the congressionally mandated April 15 deadline.  At this point it isn’t clear when the report will come out; Treasury Secretary Geithner indicated in congressional testimony last week only that it could be delayed past the G-20 meeting while the administration takes stock of the situation. Although a delay of more than two months past the deadline may seem unusual, in the early days of this report following the establishment of the Treasury’s reporting requirement in 1988, delays of several months were common. Nevertheless, the next reporting deadline the Treasury faces is October 15, 2010, and most observers believe that the last report must, at a minimum, be released before the next one is due.

Although the ongoing dispute over currency valuation has received the most attention from the market and from lawmakers, two other issues are rising in importance among US policymakers. First is China’s “indigenous innovation” rule, which grants government procurement preferences to products that use intellectual property developed and registered in China, similar to the various “Buy American” proposals which require certain purchases be of goods made in the United States.  Sen. Stabenow (D-MI) has introduced legislation that would prohibit US government purchase of Chinese products or services until China has signed the GPA, which US lawmakers hope will reverse current Chinese rules on “indigenous innovation,” Although this issue has not had the same high profile as the currency issue in the political debate thus far, it is fast becoming a significant source of concern for US policymakers; the US International Trade Commission will hold public hearings on the issue this week, which could generate additional attention on the issue as well.

A second issue that has emerged lately is a focus on the risks to US security from foreign holding of US debt. Last week the Senate approved an amendment that would require the Treasury to report quarterly on foreign holdings of US debt and to determine whether any country’s holdings posed a national security risk.  This proposal appears aimed mainly at curbing federal spending rather than influencing international purchases of US Treasury debt, and it seems unlikely to have major ramifications.  Still, there is irony in the prospect of Congress requiring an additional politically sensitive periodic report from the Treasury, as it awaits the first one on foreign exchange.

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Mactheknife's picture

This should clearly come under the heading of "be careful what you wish for". Let them float the Renminbi on up there where it should be and see what happens.

Hdawg's picture

Crushing the american consumer with an inflationary policy at the same time that luxury goods deflation hit the production cost wall, we have inflation in taxation (environmental taxes, VAT), massive price supression in food and oil (oil largely pegged to gold) via the futures derivatives shorting is starting to short physical shortages across the board.

That all adds up to hyper, hyperinflation.  

Atomizer's picture

Good evening Dave.

I simply post here as a friend and not foe. In time, you will begin to unravel the mysteries of a multi century playbook. In the meantime, watch two evils fight for power.

Unfortunately, the 2000 year old parties have a common goal and read from the same playbook. You have been warned.

Ministry Messiah

It's all about World Domination and Global Governance. Our country has moles working in the WH to succeed this goal by 2012. Don't take my word for it, just sit back & wait for all the transparent changes to become U.C.C law.

I love this site. Continue your great work.

Hdawg's picture

Someone should do piece on UCC law. 99.9% of people have no idea.


Hdawg's picture


This might be of interest to you

Carl Marks's picture

I'll trade you two pairs of underwear for your dirty socks. 

Spitzer's picture

Karl Denninger jumped on the CNBS bandwagon on his radio show today. I agreed with the BS that  Maria Bartiromo was spewing about Ron Paul owning gold stocks while advocating for a gold standard.He says it's not only a conflict of interest but that it is unpatriotic.

What a joke Denninger is becoming

TheGoodDoctor's picture

How is that a conflict of interest when the purchashing power would be the same? The only advantage would be if Ron Paul took advantage of the purchasing power during inflationary times.

Really. How many other blantant conflicts of interest are there? How about just in the Fed Reserve and Wall Street and the Government.

So Ron Paul protecting his money is a conflict of interest. What a fucking joke.

Xando's picture

Denniger is alright. But he's proud and angry. Bad mojo.

It keeps him entranced in the idea that wrongs would be righted if only the law was followed. HAHAHA.

His pride will fall, given time, because he's not dumb enough to be fooled forever.

Sooner or later he'll realize his morality play that attempts to force the fed and the banksters into doing the right thing is an insane fools errand. In fact he already suspects that to be the case even as he makes arguments that play into their hands.

He'll wake up. He'll figure it out. He'll be okay.

MarketTruth's picture

Denninger is a whiner who is living on Hopium. He hopes the system will work, he hopes laws will be followed, etc. The guy is a dreamer refusing the live with the New Reality. While i agree the New Reality stinks, you just use the new market 'rules' accordingly.

BTW, As for Ron Paul conflict, how about the MANY people in Congress/House/etc who own stock in military companies? Where is the outrage there? How about that the CongressCritters can buy stocks with INSIDER info yet not be held liable like the normal folks?

WAKE UP FOLKS, the system is a slow train wreck and Ron Paul has been a gold person for many decades. For CNBC or Denninger to talk down gold is just their way of pushing the usual love-fest for the Federal Reserve's US dollar product and the hopium towards the CFTC/SEC/etc.

PS: If KD is reading this, how about talking about the massive gov scammers legalized insider trading and their investments in military companies as they vote for contracts that help said companies? Got War?


PPS: As for China, each and every American should be THANKING China as they are keeping the US dollar propped up in value. Bernanke/Timmy are complaining because this link does not allow the US dollar to devalue further/faster.

Mako's picture

China could unpeg and China would implode very quickly.  To keep the game going longer China will have to lower the Yuan. 

Decoupling is a myth that someone sold to the sheeple.


Anarchist's picture

The Chinese can call the US names and say it is a Hegemon. 800 military bases around the world and many of them surround China, were placed to cut off China's resources and access to the sea.

Mako's picture

Capacity is not going to be the problem, demand will be.   Oh what the sheeple don't know and burry the head in the sand to avoid.

MsCreant's picture


Mako, you make as good a place as any for me to post this.


BP Death Clouds Already Onshore! Benzene-3400ppb & Hyrdrogen Sulfide- TOXIC AIR ALERT in New Orleans thanks to BP.

MacHoolahan's picture

China is playing a blinder here... The US (as helicopter Ben and his co-lunatics in the Fed seem hell-bent) is trying to inflate itself out of its eye-popping debt. But it ain't gonna work - however much they try to trash the dollar, goods from a country (i.e. China) with a dollar-peg are going to stay just as cheap!

So... the calculation (from China, I think) is keep taking the dollars. In "real" terms China's ownership of the US just keeps on going up as long as the trade direction stays that way.

Of course they can "un-peg" any time they choose, dent their own export market massively, but still have quite a stock of riches. But why would they bother doing it now when the US is utterly incapable of taking the pain (politically, socially, psychologically - you name it) that would make it anything like competitive, in global terms. Every day that grinds by with the US in its tractionless attempt to pump inflation into the system makes the Chinese richer come the final (probably near apocalyptic for the West) un-pegging.....



Mako's picture

The Chinese are not dumb and the US Treasury fully understands as well.  China could unpeg tomorrow and by this time next week you will see factories in China closing down in mass.   China will collapse when the system collapse, just like everyone else.

"Chinese richer"

Ah no.  You haven't been to china if you think they are rich buddy.   When the credit system collapses and those factories start closing like they did in late 2008 in mass, those Chinamen are going to go back to the rice patties and villages.  They have built huge cities that nobody lives in to promote the delusion all you guys are running from.  The only way China doesn't collapse is to build cities at a exponential rate forever ie unlimited power.

A  failure to understand the global credit system has led you down the wrong path. 

When the US goes it all goes. 

MacHoolahan's picture

I reckon not.... the new Chinese middle-class will collapse when real money takes hold, of course - they've been living out the Western dream of property and shareholdings - the government on the other hand has a fairly massive stockpile of commodities and as much call on the US as it has bought debt for. And every day the US continues to live out its bust-free fantasy the Chinese treasure pile grows.

Of course I'm not saying that the average Chinese is rich, happy, well-paid or whatever. I think it's partly because that's true, but remains true, that the US worker cannot compete! 

Although you say that China will collapse when the system collapses - I'm not sure they are *in* the system as such - taking the "system" to mean over-debted, under-regulated, service-industry-based, politically-rudderless Western economies.

Mako's picture

There debt/credit has been increasing exponentially in China, how do I know... well you wouldn't be seeing empty cities popping up like pimples on 14 year old over there.  

They are completely in the system, the US was the largest creditor nation in 1930, what did it mean, nothing.   The UK peaked, and collapsed... ie reserve currency... lack of credit creation kill every economy in the world. 

China relies on the lie, just like the US does and the rest of the world does.  This lie has led them to believe they can just create ghost cities to fuel the equation... a good portion of the 4 billion Asians are going to have to go.  It works for quite a while, as in this case 6 plus decades... tick tock.

The Chinese have the exact same system within the larger global system.  It will expand, it will peak, it will fail to expand, it will collapse and it will liquidate but the lies are easier to believe. 


MacHoolahan's picture

No argument from me on any of that - it's all unsustainable crap in the long run. My point is that it will fail second.

trav7777's picture

Japan didn't.

I heard all this shit 30 years ago.  They even made movies about it.  Many movies.

Most of you guys must be too young to remember when Japan was going to take over the world.  And, know what, they never had 7/10 most polluted cities in the world, smoking rivers, lead-filled toys, paint, poisonous drywall, toys, dogfood, toothpaste.

Sorry, man, China is a mess *right now* and the west's debt bubble is what props it up, not the other way around.

Anarchist's picture

Have you even been to China? Stop reading trash on the internet or watching TV and go there. It will blow your mind what hundreds of millions of people can build in 30 years. Hundreds of millions of peasants moved into the middle class in less than 20 years. Nothing like this has EVER been done in the history of man.

In the short term the building excesses will hurt China but millions of workers got a paycheck and learned a career. The long term goal of moving hundreds of millions of peasants into the cities will be achieved since new cities and housing will exist for them.

The USA is totally F'd due to the urbanization of the country. We are a country built on cheap energy, water and food. Once prices go up, living in the Burbs will become a nightmare for many. It will be too exensive to drive a car go to work for many. It is impossible to provide cost effective mass transit for the outer Burbs and they will have to be abandoned. Buying food, heating, cooling and lighting your house will chew up a large portion of the lower classes income.

Mako's picture

Yes, I have been to China, what they consider middle class is lower class.  Their lower class is beyond what most Americans can even comprehend.  Of course there are high class areas as well.   All of that growth was a function of the global credit system which is led by the US Consumer, just one problem, US consumer is gone. 

"The long term goal of moving hundreds of millions of peasants into the cities will be achieved since new cities and housing will exist for them."

Sure is, unfortunately they based their economy on the same flaw.  Which is why you saw 30-40 million of those factory workers exit back to the countryside in late 2008. 

"Everyone has a plan until they get hit"  -Mike Tyson

"Once prices go up, living in the Burbs will become a nightmare for many"

Inflation is dead for a generation or two.  The remaining factories in the US will start to be shutdown eventually and the factories in China will have to be shutdown.  Life is not a fairytale at the end of the cycle.   You read too many Peter Schiff books.

Those tanks and riot police in china are not there to attack other countries, it's to keep their own people in line.

Eventually, the next wave will start, China will have no one to sell their horrible cheap products to, factories will have to close, Chinamen will have to go back to their rice making villages.

"Sorry, man, China is a mess *right now* and the west's debt bubble is what props it up, not the other way around."


trav7777's picture

The US worker can't compete?

Neither can the Chinaman!

We have ROBOTS that are cheaper than either.

Kimo's picture

Three years ago I heard a story about a western manufacturer setting up shop in China, gave up their plans to install a conveyor belt.  Reason?  Hiring day laborers to push product on carts was cheaper than installing/maintaining a conveyor belt.

AnAnonymous's picture

Robots maintenance costs make them expensive.

A world tour of misery is to be for a long time a very viable alternative to robots.

Mako's picture

Modern advances in manufacturing have been going on for well over a 100 years.   If it were more expensive progression would have never taken place.

Of course, major advancement in production is pretty much baked in the cake now... most advances will be small now. 

Eventually those Chinamen are going to be rioting when those factories get shutdown. 

AnAnonymous's picture

The rise of robots is mostly explained by the move to standardized production for which they are much apter than human workers.

That is the main drive for robotization, not the cost of human labour.

Anarchist's picture

A big reason for the dollar peg is due to commodities being based in dollars. The long term goal is to have a convertable currency. The Chinese have cut non-dollar terms with many countries who supply their resources. The Chinese presently have a "middle" class bigger than the US especially with 20% unemployment. As this trade increases and the Chinese middle class grows, the dollar peg will not be as "tight".

The US lost three proxy wars against the Chinese. Nixons visit to China had many goals; end of proxy wars that had drained the US financially, drive a wedge between Moscow and Beijing and find markets for US goods. Once China could divert money wasted on wars and national defense, they were able to grow their economy. Bush restarted the proxy wars against China thus violating agreements China had with Nixon. Sock puppet Obama has continued the war on China.  

MarketTruth's picture


"When the credit system collapses and those factories start closing like they did in late 2008 in mass, those Chinamen are going to go back to the rice patties and villages."


And as the USA credit collapses the people get free handouts for housing, free food, free healthcare, etc and go nowhere while the USA government goes deeper into debt.


China for the win.

UGrev's picture


you fucking, self-loathing, asshole... ARRRRR.. go chew on nails!!!

Hansel's picture

All central banks are currency manipulators!!!

glenlloyd's picture

with regard to the currency issue, isn't this just another "pot meet kettle" situation?

All this fuss and protectionism, is it only me or does anyone else smell 1930/31 here?

Kimo's picture

Timmy's "Currency Manipulator" was abandoned in exchange for a UN vote against Iran.

Snidley Whipsnae's picture

Protectionism will once again trump globalization...nothing the Fed does will stop it from happening.

At the last G20 meeting little Timmy got his azz handed to him when Europe said they are going to tighten their belts and go the austerity route...little Timmy begged for more printing and Europe told him to get stuffed because they have seen this movie before. It was a watershed moment. The Chinese have gone along with QE and it's overheated their economy. Europe/China are well aware of what happened to Japan when it failed to let capitalisim work.

Europeans and Chinese workers are not afraid to fill the streets and shut down countries, unlike the US population. Once the US population looses it's freebies from the Gov they will be in the streets raising hell...human nature is the same everywhere.

The Chinese have stated time and again that their export machine runs on ~ 2% profit...a bit less than your local supermarket. What Timmy and pals are demanding is impossible; that the Chinese run their export machine at a loss. Not gonna happen. Up next more trade barriers, currency controls, higher import duties, excise taxes, etc... Usually followed by a war.

GSE externally held debt is near a trillion dollars and today we hear that it may take a trillion more to bail out the GSE's. The story is posted on Mish's site this am... Ben is full of shit if he thinks the Fed can print endlessly and baloon the Fed balance sheet to the sky...which an article posted here yesterday originated at San Fran Fed seems to be saying...deficits do matter...

"Fannie, Freddie "Mother of all Bailouts" may cost Taxpayers $1 Trillion"

Anarchist's picture

China and Japan are in debt to themselves. The entire western world is in debt to each other. The western countries will prey on each others debt slowly destroying the weaker countries. The bond holders in China and Japan (the banks or the average ciitizen) will be forced to take haircuts. I would rather be in debt to a "relative" than to a foreigner who can exact payment with a gun and "blockade" me into submission. The strong western contries have financially destroyed many smaller countries including those with huge amounts of resources. Where the IMF and WB go, misery and mass looting follows. Africa, South America ..etc know their future lies with the east, China, India ..etc. At this point of time, these countries do not have the ability to loot their countires by force. You can see the GNP of many of these countries have gone up for the first time in years. This is due to selling to the east instead of getting ripped off by the west.

Mako's picture

They are not going to take a haircut, it's going to be a blood bath see Europe.  Death spiral, what spirals up will spiral down. 

Everyone is searching for yield, required yield can't be found... end of the cycle... time for collapse.


Anarchist's picture

With a 50% average savings rate for Chinese individuals AND corporations, most can recover from a haircut. Can most entities in the west say the same? There will be pain, but China can export it's way out of problems a lot easier than most western countries. Most European countries don't export anything but debt. Even Germany has high debt, huge unfunded mandates and German banks and individuals hold a lot of bad debt from other European countries.

China has positioned itself as an exporter of finished goods. As they continue to move up the food chain, eventually they will be exporting very high dollar items. You are going to see cars, trucks, ships and eventually jet airliners. They also have become THE major exporter of processed minerals, steel, food, chemicals ..etc. The second goal is to boost income of it's populous so they can consume more of the goods their factories produce. You keep speaking of the present or of the near future. The Chinese think out 50 years. There will be pain at times but if the West does not kick off a war of attrition, China will continue it's growth.

Rick64's picture

Why is it over a decade later after the politicos passed Chinas Most favored Nation Status over and over despite human rights violations, selling M-11 missiles to Pakistan, nuclear reactor technology to Iran, ect.. that we are now upset over currency manipulation? Shouldn't this issue been planned out a long time ago and part of some agreement? If you think this is really about currency manipulation then you have bought the propaganda once again.

Anarchist's picture

Human rights violations? I guess the US attacking two soverign countries to steal their resources is not a violation of human rights? Read the recent report by the Chinese government about human rights violations by the US. 

The letters from Teddy Roosevelt to his son Kermit prove the US was complicit in Japans conquest and occupation of Manchura, Korea and Vietnam. At the same time, we were busy killing 500,000 Filipinos but I guess we had God on our side. Jesus would not approve..... 

Rick64's picture

My point is not that we are better than them, but to point out the hypocrisy and deliberate poor planning, I want to know where their high morals were when they were allowing this.  I know the U.S. is self righteous and guilty of many atrocities. The U.S. is always preaching a message that they don't adhere to. Total B.S. I guess I need to be more articulate.

Anarchist's picture

The "system" will not allow collapse of the Euro. The Fed, ECB and other central banks have been in collusion since day one.