Chinese 'Manipulate' Their Currency to Our Advantage

Politicians just can't leave well enough alone. Once again we hear the drumbeat of concern over the alleged fact that China has "manipulated" its currency—by keeping it too weak—and how that harms the U.S. economy. Yet nothing could be further from the truth.

To begin with, the Chinese yuan has appreciated by 23% since China's central bank first decided to peg the yuan to the dollar at the beginning of 1994—almost seventeen years ago. The Chinese economy has had plenty of time to adjust to its current currency regime, and if that weren't enough, the currency has appreciated significantly in the interim. Moreover, the Chinese have recently committed to allowing the yuan to appreciate even further, as suggested in the above chart.

Leaving aside the issue of whether they have kept the yuan artificially weak or not, China's monetary policy (which is driven by pegging its exchange rate) has been successful at delivering relatively low and stable inflation: since 1996, in fact, Chinese inflation has been substantially similar to that of the U.S (actually, it has been a bit lower—2% vs. 2.5% per year). This fact alone is almost proof that they haven't been keeping the currency artificially weak. (I'm leaving out 1994-95 since inflation in those years was temporarily boosted due to the 50% devaluation of the yuan that preceded its being pegged to the dollar.) In other words, our price level has risen about the same as the Chinese price level for the past 15 years. If the yuan had been chronically undervalued during that time, then Chinese inflation would most likely have been higher.

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