If there's one thing worse than a currency manipulator, it's a currency-manipulator manipulator.
Mitt Romney has made it abundantly clear that he's fed up with China maintaining an artificially low currency to steal jobs from American workers. Or something like that. If he wins next Tuesday's too-close-to-call presidential election, he has pledged to use his first day in office to formally declare China a "currency manipulator."
It's not just a geoeconomic slur, and it's not something the U.S. government tosses around lightly; it hasn't labelled any country a currency manipulator for 18 years. Applying the tag would open the door for the government to impose punitive tariffs and duties on Chinese goods entering the country.
Slapping a currency manipulator label on China now might be politically expedient for Mr. Romney. But it isn't accurate, it isn't fair and it isn't wise.
Yes, China's currency (alternatively referred to as the yuan or the renminbi) is far from free-floating; even though China's central bank has loosened its heavy hand on the currency in recent years, it still only allows it to trade within a designated range around a central reference point that the bank itself fixes daily. Yes, it's probably still artificially undervalued relative to other major currencies, a trade-distorting condition that promotes Chinese economic growth at the expense of its trading partners.
But China is far from the only country in the world without a free-floating currency, nor is it alone in pulling policy levers that influence exchange rates. (Critics have recently suggested the manipulator label could just as easily be applied to Switzerland or Israel – or even to the U.S. Federal Reserve Board, for its quantitative easing.)
And China's currency is a lot better than it was even a few years ago, and a lot closer to fair value than Mr. Romney and other China critics would have you believe.
Since 2005, when it first stuck a toe in the currency-reform waters, China has allowed the yuan to rise by 33 per cent against the U.S. dollar. Since mid-2010, when China increased the flexibility in its exchange rate to allow it to better reflect market forces, the yuan is up nearly 10 per cent.
Meanwhile, China's current-account surplus has fallen sharply in the past four years. Its foreign-exchange reserves, which soared last decade, have been flat for the past year. Both are signs of a currency that has moved closer to fair value.
The yuan did experience a relatively short-lived slump in value in the middle of this year – a move that rekindled fears that China was slamming the brakes on its currency appreciation. But the decline more reflected a global safe-haven rush to the U.S. dollar, which surged not only against the yuan but against most other currencies – including the Canadian dollar. Chinese policy was not the culprit here, and the yuan has resumed its rise since midsummer.
The U.S. Treasury Department's most recent review of global exchange-rate policies, published last May, concluded that China doesn't meet the criteria to be labelled a currency manipulator. Indeed, the Treasury report points out that China's exchange rate is a better reflection of fair value than it has been in years – though it maintains the currency distortions remain significant.
"China is gradually allowing necessary external adjustments to take place, as indicated by the decline in China's current account surplus together with real appreciation of the [yuan] since June, 2010, and China's steps to gradually open its capital account," the report said. "Nevertheless, the underlying factors that distort China's economy and constrain global demand growth remain."
In short, there's still a problem, but China has been moving in the right direction.
That has largely been President Obama's position. As long as the U.S. and others are successfully nudging/pressuring/badgering/shaming China into gradually cleaning up its act, there's no need to throw a large-scale protectionist tantrum in the form of the "manipulator" designation.
But Mr. Romney sees a cheater that's getting rich at the expense of Americans while ever so slowly reducing its cheating. And, more to the point, he sees a political opportunity. He's prepared to toss out the Treasury Department's own set of rules, and own assessment of the situation, to personally stamp "currency manipulator" on China.
Nothing like kicking off your presidency by creating a diplomatic rift and starting a trade war between the world's two biggest economies, is there? And all in an attempt (nominally, anyway) to get the currency market to a place where China is heading anyway.