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Busch: Yuan is the Word

The Chinese currencyhas had a big move since the beginning of September. The renminbi or yuan has appreciated over 550 points moving from 6.8175 down to 6.7618. This is a larger move than what happened in June when the Chinese pledged to allow the currency to reflect economic fundamentals.

Why is this occurring?

Some of the move can be explained by the recent spate of positive Chinese economic data. In August, the global equity markets were unsettled by the unexpected drop in Chinese imports and the concern was that Chinese growth was slowing. In September, these fears have receded after Chinese imports surged and Chinese industrial production increased 13.9%.

The other driver of the currency appreciation is political.

China
DAJ | Getty Images
China

Late Friday, US Treasury Secretary Tim Geithner explicitly stated that China has not done enough to allow its currency to rise.

"China took the very important step in June of signaling that they're going to let the exchange rate start to reflect market forces. But they've done very, very little, they've let it move very, very little in the interim," Mr. Geithner said in an interview with The Wall Street Journal.

The timing of this interview and statement should not come as a surprise.

This week, House Ways and Means Committee (Acting Chairman Levin, D-Mich.) will hold a hearing on whether China has made material progress in allowing appreciation of the exchange rate for its currency and what action Congress and the administration may need to take to address China's exchange rate policy and its effect on the U.S. and global economic recoveries and on U.S. job creation according to CQ. The committee will discuss the Currency Reform for Fair Trade Act and the initiation of formal dispute settlement consultations with China within the World Trade Organization.

"While a free floating currency has many benefits for China and the US, it clearly is not the panacea for the trade imbalance. However, it is a great way for politicians to appear to be acting tough." -BMO Capital Markets, Andrew Busch

Clearly, the heat is being turned up on China to allow their currency to appreciate against the US dollar in the hopes that this will reduce its trade surplus with the United States. Since 2005, the currency has appreciated over 18% against the US dollar and the trade surplus has not eased. While a free floating currency has many benefits for China and the US, it clearly is not the panacea for the trade imbalance. However, it is a great way for politicians to appear to be acting tough.

I've argued that the best way to compete with China and others is to put our US companies on the same financial footing by cutting corporate taxes to below the rates enjoyed by our trade partners. This is the swiftest method to level the global playing field and to the swiftest method to stimulate job growth in the United States.

Last week, the Obama administration announced an aggressive program to assist businesses with a rapid depreciation write-down period. This is a big step in the right direction. If they are truly interested in improving the trade deficit, they would announce a plan to cut corporate taxes and continue down this path towards improving US competitiveness.

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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.

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