Currency manipulation (#115; Topic B)

After a week or two's macho action, akin to a player's making high-stake raises in a poker game with but a deuce as the hole card, the talk about China's being a "currency manipulator" has subsided -- and the rumor inside the beltway is that a new US player is likely to be installed. Seizing this occasion, the 4/3/06 issue of Barron's, the Wall Street Journal's sister publication, offered a historical discourse on US Treasury secretaries' efforts in "stabilizing the dollar" over the last 25 or so years. It seems that, back in 1987, Jim Baker, Reagan's Treasury secretary, tried the same tactic on Germany. Following a rebuff, "Treasury-bond yields topped 10%, and the Dow plunged 22% on a single Monday, October 19, 1987." Michael Blumenthal, Carter's Treasury secretary and US's next player, "also endorsed a little dollar debasement as what's good for the U.S. economy." The article then said: "But things are different now, aren't they? We stand four-square for a strong, stable dollar, but at the same time we want an upward appreciation of the Chinese yuan. We want the world to keep sending its excess capital to cover our current-account deficit, but only to buy our low-yielding IOUs." (pp 7-8). My sentiment exactly. The 4/1/06 issue of Economist clarified the issue with a revealing chart, showing that (due to a stronger US dollar relative to the Euro) the yuan, in Euro terms, has appreciated by about 16.5% since January 2005 (the peak was 19+% in November 2005). The article then continued: "Those who accuse the Chinese of pursuing a cheap-yuan plicy forget that during the East Asian crisis [in the 1990s] China did not devalue, although almost all its neighbors did." Indeed, to discourage currency speculation, such as by a well-known specimen camouflaged as a philanthropist, who almost brought down Thailand's economy single-handedly in the 1990s, China, based on my reading of materials in Chinese, is likely to do a gradual revaluation of the yuan pari passu with the prevailing interest rate -- with the latter at 4-3/4%, (a speculator's cost) a revaluation of up to 5% over a year's time (the benefit) would hardly make currency speculation profitable. We'll see.
Posted at 7:02 pm EDT, Sunday, April 2, 2006