Since China announced its currency reform policy over the weekend, credit has been ascribed to saber-rattling on the part of the U.S. Congress, and – conversely – the quiet diplomacy the Obama Administration, or some magical elixir combining both.
Certainly, Sen. Chuck Schumer likes to believe he had a hand in forcing China to act, that his barking dog on the porch role strengthens Secretary Geithner’s hand in negotiations with the Chinese.
For Schumer, this all makes for good story-telling, but it’s far removed from reality. If you feel like you’ve seen this play before, its because you have: substitute John Snow for Tim Geithner, and George W. Bush for Barack Obama, and you see that 2010 is merely a reprise of 2005 (with Schumer returning for an encore performance).
By 2005, China had held its currency steady since the Asian Financial Crisis in the late 1990s. Treasury Secretary Geithner and NEC Director Larry Summers recall this well, as they (correctly) encouraged a stable Chinese currency to help stem the cycle of dangerous devaluations in the region at the time.
In order to better align its currency with domestic priorities, including a shift toward market-oriented policies and away from administrative fiat, China in 2005 determined to slightly revalue its currency and then allow it to very gradually, yet steadily, adjust — referencing a basket of currencies. And during the three years of flexibility, the RMB appreciated 21% relative to the U.S. dollar.