As the largest foreign holder of U.S. government debt, China has made a killing on its portfolio of U.S. bonds – earning double-digit returns on its trillion-dollar Treasury holdings in just the past two months. And yet just as investors who do well on an investment sometimes regret the high frictional costs weighing down their returns, the Chinese, who presumably picked up a sweet $100-billion-plus profit on their U.S. bond investments could have done a lot better if their broker had not manipulated the exchange rate on its transactions.
No, China did not buy its bonds through BNY Mellon, which stands accused in federal and state lawsuits filed last week of cheating corporate clients through unfavorable rates in foreign exchange transactions – a charge the firm vigorously denies.
Rather, the cheating broker is none other than its own central bank, the Bank of China, which is widely believed to be suppressing the value of its currency despite pledges it would allow the renminbi to float freely. In other words, if China really allowed its currency to rise to its genuine market value, which it assured the U.S. it would do last year, the Bank of China could have gotten a lot more bang for its renminbi, and the U.S. would owe considerably more to China today.
All of which is to say that it is not so clear-cut who wins and who loses through Chinese currency manipulation, something that is sure to emerge in debates on the floor of the U.S. Senate on Monday as the upper chamber considers the Currency Exchange Rate Oversight Reform Act of 2011. The bill enjoys wide bipartisan support in the Senate and final passage of the bill is expected Monday, though serious opposition in the Republican-controlled House may block a vote there.
The bill imposes tariffs on imports from China if the Chinese do not allow the free float of their currency. China’s foreign ministry reiterated today its view that passage of the bill could lead to a trade war between the two countries.
Despite the fact that Chinese currency manipulation is a many-splendored thing, limiting the purchasing power of its renminbi even while boosting its export-oriented manufacturing sector, the key issue on U.S. lawmakers’ minds is jobs.
Congressman Sander Levin (D-Mich.), writing last week in The Hill, cites economist Fred Bergston, who argues that Chinese currency manipulation costs Americans 1 million jobs, and also cites economist and New York Times columnist Paul Krugman, who puts the figure at closer to 1.5 million jobs. John Lott Jr., writing for Fox News, says passage of the bill will do far more damage to U.S. jobs, noting that in our highly integrated world economies, companies like Apple that rely on Chinese parts for its iPads and iPhones, will be forced to raise prices; he adds that higher import prices will trigger an increase in unemployment.
It remains unclear whether something like the China currency bill will eventually pass into law, but with a stubbornly high U.S. unemployment rate that has been north of 9% for two years now – during our economic recovery – the pressure on politicians in both parties to “do something” is not likely to diminish any time soon.