| STEVE H. HANKE | Steve H. HANKE |
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CONTRIBUTING EDITOR Professor of Applied Economics at the Johns Hopkins University & Columnist at Forbes magazine |
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China’s Currency |
In November, the European finance ministers spoke out strongly against the weakness of China’s currency, the yuan, relative to the euro. Peter MANDELSON, the EU trade commissioner, joined the finance ministers in calling for a stronger yuan. Jean-Claude TRICHET, the European Central Bank president, and Joaquin ALMUNIA, the EU monetary affairs commissioner, have also expressed their displeasure with the yuan-euro exchange rate. I was introduced to the Chinese currency controversy five years ago when I appeared as a witness before the U.S. Senate Banking Committee on May 1, 2002. The purpose of those hearings was to determine, among other things, whether China was manipulating its exchange rate. United States law actually requires the U.S. Treasury Department, in consultation with the International Monetary Fund, to report bi-yearly as to whether countries – like China – are gaining an “unfair” competitive advantage in international trade by manipulating their currencies. The U.S. Treasury failed to name China a currency manipulator back in May 2002, and it hasn’t done so since then. This isn’t too surprising since the term “currency manipulation” is hard to define and, therefore, is not an operational concept that can be used for economic analysis. But this fact has not stopped politicians and special interest groups in the United States, and elsewhere, from asserting that China manipulates the yuan. Protectionists from both political parties in the U.S. have threatened to impose tariffs on imported Chinese goods if Beijing does not dramatically appreciate the yuan. These protectionists even claim that China would be much better off if it allowed the yuan to become stronger vis-à-vis the U.S. dollar. This is not the first time U.S. special interests have made assertions in the name of helping China. During his first term, Franklin D. ROOSEVELT delivered on a promise to do something to help silver producers. Using the authority granted by the Thomas Amendment of 1933 and the Silver Purchase Act of 1934, the Roosevelt Administration bought silver. This, in addition to bullish rumors about U.S. silver policies, helped push the price of silver up by 128% (calculated as an annual average) in the 1932-35 period. Bizarre arguments contributed mightily to the agitation for high silver prices. One centered on China and the fact that it was on the silver standard. Silver interests asserted that higher silver prices—which would bring with them an appreciation in the yuan—would benefit the Chinese by increasing their purchasing power. As a special committee of the U.S. Senate reported in 1932, “Silver is the measure of their wealth and purchasing power; it serves as a reserve, their bank account. This is wealth that enables such peoples to purchase our exports.” Things didn’t work according to Washington’s scenario. As the dollar price of silver and of the yuan shot up, China was thrown into the jaws of depression and deflation. In the 1932-34 period, gross domestic product fell by 26% and wholesale prices in the capital city, Nanjing, fell by 20%. In an attempt to secure relief from the economic hardships imposed by U.S. silver policies, China sought modifications in the U.S. Treasury’s silver-purchase program. But its pleas fell on deaf ears. After many evasive replies, the Roosevelt Administration finally indicated on October 12, 1934 that it was merely carrying out a policy mandated by the U.S. Congress. Realizing that all hope was lost, China was forced to effectively abandon the silver standard on October 14, 1934, though an official statement was postponed until November 3, 1935. This spelled the beginning of the end for Chiang Kai-shek’s Nationalist govern-ment. History doesn’t have to repeat itself and probably won’t. After all, a significant yuan appreciation against the dollar today would result in a nasty deflationary impulse, as it did in the 1930s. This would completely sink China’s banking system and spread untold hardship among China’s 800 million restless rural residents. Foreign politicians should stop bashing the Chinese about the yuan’s exchange rate. This would allow the Chinese to focus on removing exchange controls on the yuan so that it would be fully convertible. Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C.
