The Return of the Renminbi Rant

NEW HAVEN – China’s currency, the renminbi, has been weakening in recent months, resurrecting familiar charges of manipulation, competitive devaluation, and beggar-thy-neighbor mercantilism. In mid-April, the US Treasury expressed “particularly serious concerns” over this development, underscoring what has long been one of the most contentious economic-policy issues between the United States and China.

This is a timeworn debate – politically inspired and grounded in bad economics – that does a serious disservice to both sides by diverting attention from far more important issues affecting the US-China economic relationship. Taken to its extreme, America’s accusations risk pushing the world’s two largest economies down the slippery slope of trade frictions, protectionism, or something even worse.

First, the facts: Since hitting its high watermark on January 14, 2014, the renminbi has depreciated by 3.4% relative to the US dollar through April 25. This follows a cumulative appreciation of 37% since July 21, 2005, when China dropped its dollar peg and shifted its currency regime to a so-called “managed float.” Relative to where it started nearly nine years ago, the renminbi is still up 32.5%.

Over the same period, there has been a dramatic adjustment of China’s international balance-of-payments position. The current-account surplus – the most telling symptom of an undervalued currency – has narrowed from a record 10.1% of GDP in 2007 to just 2.1% in 2013. The International Monetary Fund’s latest forecast suggests that the surplus will hold at around 2% of GDP in 2014.