China is not a currency manipulator, but along with Malaysia, Germany, and several other studs of the modern world economy, it might be. So says the latest periodic Treasury report, in which the U.S. refrained once again from saying China is a currency manipulator—after all that bluster from back when that this was sure to happen.
What's a currency manipulator? Etymologically, it's hard to see. "Manipulate" means to reconfigure with one's hands. As in mano a mano, or even manacle. As for "invisible hand," apparently Adam Smith got that metaphor from an associate who had spoken of the "invisible hand of Jupiter." Try to manacle that.
The Treasury criteria are three. A nation is a currency manipulator if it, at high levels, runs a trade and current account surplus bilaterally (with the U.S.) and buys foreign currency. Here's Treasury on China:
"The outsized magnitude of the bilateral [trade goods] deficit is a result of China's persistent and widespread use of non-tariff barriers, non-market mechanisms, state subsidies, and other discriminatory measures that are increasingly distorting China’s trading and investment relationships."
Treasury missed the biggest thing. China's money has Mao's picture on it. Nobody globally (including in Hong Kong) wants to have their wealth denominated in that sort of money.
Therefore, China has to collateralize its currency in the kind of money people want, things like the dollar, gold, etc. This makes the Mao's-picture currency convertible, de facto, in globally good currency. As the Chinese economy has grown, so therefore has China's demand for non-Mao-like monetary instruments, to keep the collateralization credible.
The way The People's Republic acquires this global good money is, necessarily, to trade non-money (i.e., goods and services) for it. Hence the trade surplus.
That the Treasury declined to make this point—the central fact of the U.S.-China trading relationship for decades now—defies understanding. It is a mark of a lack of seriousness.
As for currency manipulation, the charge we have long heard is that the Chinese keep their currency undervalued against the dollar. This enables (per the theory) the trade surplus with the U.S.
It is an odd claim for the United States to make. The United States has plenary power to set a floor on the dollar-Chinese RMB exchange rate. The United States controls production of dollars. Therefore, it can buy RMB in unlimited quantities. Anytime the RMB falls below a certain level in dollars, the U.S. can buy RMB to any degree necessary to bid the price back up.
Back when we were serious and dutiful in our thinking about fixed exchange rates, that is how those things worked. Two countries would agree to establish floors on the other currency in their own. The U.S. and Britain, say, would agree to buy each other's currency anytime a par was breached on the low end. This fixed the exchange rate.
Perhaps it is assumed we would need another grandiose confab years in the making, a Bretton Woods, to have a fixed-exchange-rate reform. Actually, it could be done "bilaterally," to use the Treasury's word of choice, any time. If, say, the U.S and the euro masters made the agreement, the world would effectively be on fixed rates, because of the largeness and significance of these economic regions.
The Treasury's manipulation report stood out in its evasion of (perhaps just cluelessness about) the central issue: the world is longing for good money. The scandal is not so much that the Chinese still lack the world’s faith as a money producer. The scandal is that given the inordinate global demand for the dollar—for which producers foreign and domestic will exchange magnificent quantities of goods and services—we still have a tax system.
