Our administration in a nutshell: in the just released "Semiannual Report on International Economic and Exchange Rate Policies" by the Treasury, the conclusion is that while China isn't really a currency manipulator, which it obviously is via the CNYUSD peg, inasmuch as the US also is courtesy of the Hewlett Vissarionovich, "progress thus far is insufficient and that more rapid progress is needed." Win win for everyone, as the global FX attrition war continues (we lob inflation at them, they lob it back ten fold). In the meantime, the status quo is great and let's all pray that the global revolutions end with Egypt, which a month ago few even could point out on a map.
The salient section exposing just how pragmatic our fearless leaders are... and who has all the leverage.
With respect to exchange rate policies, ten economies were reviewed in this Report, accounting for nearly three-fourths of U.S. trade. Many of the economies have fully flexible exchange rates. A few have more tightly managed exchange rates, with varying degrees of management. This report highlights the need for greater exchange rate flexibility, most notably by China, but also in other economies.
In China, the authorities decided in June 2010 to once again allow the exchange rate to appreciate in response to market forces. Since the June announcement, the renminbi (RMB) has appreciated by a total of 3.7 percent against the dollar as of January 27, or at a rate of approximately six percent per year in nominal terms. Because inflation in China is significantly higher than it is in the United States (in the second half of 2010, the annual rate of CPI inflation was more than 5 percentage points higher in China than in the United States), the RMB has been appreciating more rapidly against the dollar on a real, inflation-adjusted basis, at a rate which if sustained would amount to more than 10 percent per year. China is also undertaking a relaxation of restrictions on the use of the RMB. These reforms will gradually erode the controls that help the authorities manage the level of the exchange rate, and over time will contribute to a more market-determined exchange rate.
China’s continued rapid pace of foreign reserve accumulation and the huge flow of capital from the Chinese public to advanced countries that it implies, the essentially unchanged level of China’s real effective exchange rate especially given rapid productivity growth in the traded goods sector, and widening of current account surpluses, all indicate that the renminbi remains substantially undervalued. It is in China’s interest to allow the nominal exchange rate to appreciate more rapidly, both against the dollar and against the currencies of its other major trading partners. If it does not, China will face the risk of more rapid inflation, excessively rapid expansion of domestic credit, and upward pressure on property and equity prices, all of which could threaten future economic growth. By trying to limit the pace of appreciation, China’s exchange rate policy is also working against its broad strategy to strengthen domestic demand. And China’s gradualist approach on the exchange rate also adds to the substantial pressure now being experienced by other emerging economies that run more flexible exchange rate systems and that have already seen substantial exchange rate appreciation.
Many in China recognize that China is too large relative to the world economy for it to continue to rely on foreign demand to grow. They also recognize that exchange rate flexibility needs to be part of China’s efforts to change its pattern of growth. During President Hu’s state visit to the United States in January 2011, China committed in a joint statement of Presidents Obama and Hu that “China will continue to promote RMB exchange rate reform and enhance RMB exchange rate flexibility, and promote the transformation of its economic development model.”
Based on the resumption of exchange rate flexibility last June and the acceleration of the pace of real bilateral appreciation over the past few months, and in view of the commitment during President Hu’s visit that China will intensify its efforts to expand domestic demand and further enhance exchange rate flexibility, Treasury has concluded that the standards identified in Section 3004 of the Act during the period covered in this Report have not been met with respect to China. Treasury’s view, however, is that progress thus far is insufficient and that more rapid progress is needed. Treasury will continue to closely monitor the pace of appreciation of the RMB by China.
Next up, Chuck Schumer to do a repeat of the whole very loud song and dance, which will also achieve absolutely nothing.
Full report (pdf):