China | Alice in Trumperland and China's currency: Spengler

Alice in Trumperland and China’s currency: Spengler

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“There’s a trade war on with China, and we’re losing it,” radio talk show host Laura Ingraham hectored Sen. Ted Cruz, who opposes legislation to punish China for alleged currency manipulation. “Ted, you’re on the wrong side of history on this issue,” Ingraham added. Ms. Ingraham somehow had made her way to the wrong side of the looking-glass, where everything is backwards.

For those of us on the right side of the looking-glass, that is, in the real world rather than Trumperland, the opposite is the case: China’s real effective change rate (the trade-weighted exchange rate adjusted for differences in inflation) is twice as high as it was 20 years ago, and 40% higher than it was in 2008. China’s currency has been going up, and not down.


As it happens, China’s exports to the US have barely grown since the 2008 crisis. The chart below shows annualized growth of US imports from China over a rolling five-year interval. Until the 2008 recession US imports from China were growing at annual rates of 15% to 30%. Growth during the past five years has been barely above 3%.


The reason China’s real effective exchange rate rose so much is that China effectively pegged its currency to the US dollar. The dollar has risen by 25% on a trade-weighted basis since early 2014, when the Federal Reserve announced it would raise interest rates. Only after the US dollar rose by 25% (and the Chinese currency rose with it) did China allow its currency to fall slightly against the dollar–because the Chinese currency had risen massively against every other currency in the world.


The jump in the value of China’s currency due to China’s refusal to let its currrency fall against the dollar did enormous damage to China’s exports. In an Oct. 27, 2014 study for Reorient Group in Hong Kong, I showed that changes in the Chinese yuan’s real effective rate accurately predicted changes in Chinese exports with a three-month lag.



In the cited report I observed:

In the case of the trade-weighted exchange rate, we observe that changes in the trade-weighted exchange rate predict changes in export growth. With an r2 of 67%, y-o-y changes in trade-weighted CNY lagged one quarter predict y-o-y changes in exports. Slowing export growth has been closely associated with a rising exchange rate.

To keep the dollar peg, moreover, China was forced to keep domestic interest rates at the highest level of any major economy in the world. That put additional strains on China’s economy.


Ms. Ingraham’s claim that America already is in a trade war with China is contrafactual. There is no trade war except in her excessively vivid imagination. The facts support Sen. Cruz.

America surely should worry about China: it faces competition from tech firms like the communications giant Huawei, which is investing 15% of its gross revenue in research and development. How many American firms invest that much of their revenues in R&D? In some important fields China is closing the technology gap with the United States. Complaining about currency manipulation, though, will not help, especially when it isn’t there.

The opinions expressed in this column are the author’s own and do not necessarily reflect the view of Asia Times.

David P. Goldman
David Paul Goldman (born September 27, 1951) is an American economist, music critic, and author, best known for his series of online essays in the Asia Times under the pseudonym Spengler. Goldman sits on the board of Asia Times Holdings.