Fratto: China's Back to the Future Policy

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.

James Hardy | Photo Alto RF | Getty Images

Was Schumer’s bark and threatened bite helpful?


At most, Schumer’s threats are a nuisance in the bilateral relationship, and one handled not by the Chinese, but by the U.S. administration. The Chinese know that such damaging legislation would be vetoed by any responsible White House, Republican or Democrat.

Here’s what you need to remember about the Chinese: they are supremely confident in their ability to manage their own economy, and they take a long view.

One can disagree with the pace of change in China, or question their strategy and competency — as long as you understand that the Chinese don’t. They have a plan — a long-term, 5-year plan — and they’re executing it. That plan includes the eventual establishment of a fully convertible Chinese currency, in addition to other macroeconomic reforms, like more effective use of the policy rate by the central bank.

The Chinese may occasionally deviate from their plan when confronted with major externalities like the financial crisis, or disruptions in the Eurozone economies. But once those crises pass, they return to their plan — as they did this weekend.

Chinese economic officials understand that their country’s long-term future in the global economy must eventually rest on a foundation of basic market-oriented policies. Following the financial disruptions of recent years, they now are going back to the future.


Tony Fratto, a CNBC contributor, is Managing Director of Hamilton Place Strategies – a strategic economic policy and communications firm based in Washington, DC. He is a former White House Deputy Press Secretary for the George W. Bush Administration and Assistant Secretary of the Treasury. You can follow him on Twitter at