First, the facts: Since hitting its high watermark on January 14, 2014, the renminbi has depreciated by 3.4% relative to the US dollar through April 25. This follows a cumulative appreciation of 37% since July 21, 2005, when China dropped its dollar peg and shifted its currency regime to a so-called "managed float." Relative to where it started nearly nine years ago, the renminbi is still up 32.5%.
Over the same period, there has been a dramatic adjustment of China's international balance-of-payments position. The current-account surplus — the most telling symptom of an undervalued currency — has narrowed from a record 10.1% of GDP in 2007 to just 2.1% in 2013. The International Monetary Fund's latest forecast suggests that the surplus will hold at around 2% of GDP in 2014.
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Seen against this background, US officials' handwringing over the recent modest reversal in the renminbi's exchange rate appears absurd. With China's external position much closer to balance, there is good reason to argue that the renminbi, having appreciated by nearly one-third since mid-2005, is now within a reasonable proximity of "fair value." The IMF conceded as much in its latest in-depth review of the Chinese economy, which calls the renminbi "moderately undervalued" by 5-10%. This stands in contrast to its earlier assessments of "substantial" undervaluation.
America's fixation on the renminbi is a classic case of political denial. With US workers remaining under intense pressure in terms of both job security and real wages, politicians have understandably been put on the spot. In response, they have fixated on the Chinese component of a long-gaping trade deficit, charging that currency manipulation is the culprit to the long festering woes of the American middle class.