Republican presidential candidate Mitt Romney vowed he'd do this as president. Senator Chuck Schumer (D-NY) has been a public advocate of it. But the White House says it would not label the nation's largest trading partner — China — a currency manipulator.
In its semi-annual report to Congress on international economic and exchange rate policies, the Treasury Department says China has taken steps to appreciate its currency, the renminbi, and "Chinese authorities have substantially reduced the level of official intervention in exchange markets since the third quarter of 2011." According to the report, China's move to a flexible exchange rate regime has caused the renminbi to appreciate 12.6% against the U.S. dollar since June 2010 (adjusting for inflation) but the currency "remains significantly undervalued, and further appreciation of the RMB against the dollar and other major currencies is warranted."
As The Daily Ticker's Aaron Task and Henry Blodget discuss in the attached clip, all countries manipulate their currencies to some extent. The Federal Reserve has had to defend its monetary policies against international criticism. Guido Mantega, Brazil's finance minister, has warned that the Fed's easy-money policies would likely create asset bubbles, currency appreciation and inflation; he also claims the Fed's policies have contributed to a "monetary tsunami" in emerging markets. Reuters reports the U.S. Treasury has not given a currency manipulator label to any country in 18 years. China did receive that designation by the U.S. government between 1992 and 1994.
The Chinese government largely controls the appreciation of its currency and has been accused by world leaders as purposely influencing how it trades to gain an advantage. A weak Chinese currency makes Chinese goods cheaper abroad and U.S. and European goods more expensive in the world's second-largest economy. Many U.S. businesses say they cannot compete against Chinese manufacturers because of China's currency policy. But a lot of American consumers also depend on cheap goods from China, Task notes.
Chinese Foreign Ministry Spokesman Hong Lei told reporters in Beijing that currency manipulation allegations are unfounded.
"In recent years, the ratio between China's GDP and the current account surplus has decreased on a daily basis," he said. "The renminbi's exchange rate is in equilibrium. There is no so-called problem that the exchange rate is undervalued."
The Obama administration may be taking a forceful but careful tone with its top creditor to prevent a possible trade war. Whether or not China could increase the value of its currency poses the biggest question of all. The country does not have trillion dollar deficits as the U.S. and Europe but its red-hot economy has been slowing in recent years. How strong China's underlying fundamentals are remain a mystery to everyone one but the Chinese.