OPEN APP
Home >Opinion >Online-views >A wrong tag for China
Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

A wrong tag for China

Labelling a country a currency manipulator should be avoided, especially in the absence of evidence

Mitt Romney, the Republican candidate in the US presidential election, has maintained throughout his campaign that he will declare China a currency manipulator if he is elected. Romney may or may not become the next US president, but the idea of targeting China as a currency manipulator can have unhappy consequences, not only for the US and China but for rest of the world, too.

These are difficult times for most economies. Protectionism and weak currencies are preferred options for many countries. What Romney is suggesting can potentially provoke China into taking an equally damaging step. Given the state of the world, a trade war with wider geopolitical repercussions is not a far-fetched possibility.

In the first place, why label China alone as a currency manipulator? An article in The Washington Post on 22 October shows that there are a number of countries that deserve this label far more than China does. For example, the foreign exchange reserves of Singapore at the end of 2011 were close to 93% of its gross domestic product (GDP) while its average current account surplus during 2001-2011 was 19% of GDP. The figures for China were 45% of the GDP (reserves) and 5% of GDP (current account surplus during the same period).

Moreover, what is not sufficiently appreciated by Romney and his colleagues in the Republican Party is that China holds securities worth over a trillion dollars of US treasury, and any pullout, despite the undisputed power of the Federal Reserve to print money, will have damaging consequences in the US debt market and affects the government’s chances to raise money at a lower cost. Higher interest cost will further push the deficit and the need for borrowing. Furthermore, higher yields on treasuries will automatically push borrowing cost for business affecting the economic recovery, which in any case is extremely fragile.

This is not painting a doomsday scenario. But such steps, if they are ever taken, will have global effects. Therefore, extreme ideas such as labelling a country as a currency manipulator are best avoided, especially when there is no clinching evidence to prove it, except for the fact that China has accumulated large reserves.

To be sure, a weak yuan has helped China turn into an export powerhouse and this, very often, provokes resentment.

A much better course of action will be for the US, along with the global community, to persuade China that it is in its own interest that it allows the yuan to appreciate in order to promote domestic consumption and rebalance the Chinese economy.

Will labeling China a currency manipulator serve any purpose? Tell us at views@livemint.com

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.

Close
×
Edit Profile
My ReadsRedeem a Gift CardLogout