Last Thursday, reports Reuters, “a bipartisan group of 101 U.S. lawmakers in the House of Representatives launched a new bid on Thursday to pass legislation aimed at pressuring China to let its yuan currency rise in value.”
Coincidence? On that very day, the Chinese yuan hit a record high of 6.5849 against the U.S. dollar. So maybe a legislative hammer won’t be necessary. Indeed, according to a provocative post earlier last week by C. Fred Bergsten, director of the Peterson Institute for International Economics, there’s been a real “breakthrough” on the yuan (also referred to as the renminbi) reevaulation front in recent months.
The nominal exchange rate of the renminbi has now appreciated by about 3.7 percent against the dollar since China announced last June that it would let the rate start moving upward again. During this same period, Chinese inflation has accelerated and is running substantially above that of the United States (which is less than 2 percent)…. It is safe to say… that the real exchange rate of the renminbi has risen by at least 5 percent against the dollar over the past seven months, producing a real appreciation against the dollar at an annual rate of at least 10 percent and perhaps as much as 12 percent.
This is significant, because if sustained, it means that the yuan could appreciate more than 20 percent (when inflation is taken into account) in a period of just two years. That would have a significant positive impact on the United States economy. So who gets the credit?
Why has China moved now? First, the United States has clearly escalated its pressure in a series of private conversations over the past six months while respecting China’s obsession with avoiding the appearance of capitulating to public admonitions. President Obama reportedly placed highest priority on the currency issue during his extensive bilateral conversation with President Hu Jintao around the G-20 summit in Seoul in early November.
And just how big a deal could this be?
The postulated outcome, a rise of 20 to 30 percent in the renminbi over two to three years, would have major positive effects. China’s global current account surplus would drop by $300 billion or so from the rising path that it would otherwise be on… The US external deficit would drop by $50 billion to $100 billion, creating perhaps 500,000 new and high-paying jobs (mainly in export industries) in this country. We know that currency changes produce these powerful results because the earlier rise of the renminbi during 2005-08 and the 25 percent fall of the dollar during 2002-07, along with the global recession, produced declines (with the usual lags) of fully one half in both countries’ imbalances by 2009 (before they started rising again last year because the currency corrections halted or reversed).
The Peterson Institute tends to be less confrontational on China policy issues than other Washington actors, so we should probably be wary of any analysis that paints Chinese developments in an excessively positive light coming from that quarter. But there’s still a story here, that if true, is very interesting: Quiet diplomacy by the Obama administration behind the scenes, effectively addressing a key global macroeconomic issue to the benefit of the U.S. economy — and U.S. workers. That will be a narrative well worth tracking.