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.