Sunday, August 4, 2013

PBoC pushing the yuan lower; will infuriate US manufacturing lobby

While the yuan is trading around 6.13 to the dollar, the PBoC is guiding the currency weaker. The so-called PBoC "midpoint" is now at 6.1817 - a level not seen since May. The currency is allowed to trade 1% higher or lower than the level set each morning by the central bank. The current trading level is 0.8% stronger than the midpoint.

PBoC midpoint USD/CNY

Given the nation's recent weakness in exports (see post), the yuan appreciation policy is over for now. China's officials have hinted for a while that exporters need help, and setting the currency level is the primary tool used to help them.

As discussed (see post), this is not going to resonate well in the US, especially given that 2014 is a midterm election year. The US manufacturing lobby is already raising the temperature on China's currency practices (on top of other complaints). The piece below was written last week by Scott N. Paul, President of the Alliance for American Manufacturing (AAM).
Rockford Register Star (based in Illinois): - ... Since we granted normalized trade relations to Beijing over a decade ago, we’ve traded production capacity, and about 2.7 million middle-class jobs (including more than 113,000 in Illinois) to China in order to live high on the consumption hog.

Beijing fuels this trade gap through massive subsidies while also forcing American companies to transfer intellectual property, ignoring widespread counterfeiting and stealing everything from Coca-Cola trade secrets to Pentagon missile-defense plans.

But ultimately, no single subterfuge does as much sustained damage to the American economy as Beijing’s policy of currency manipulation.

China holds massive reserves of American dollars. By hoarding cash, Beijing actively works to inflate the value of the dollar while artificially lowering the value of its own currency, the yuan. Doing so acts as a hidden tax on American goods entering the Chinese market and a subsidy for Chinese goods entering our home market.

By distorting the market with its rigged currency, China has exponentially expanded its wealth. It’s past time our leaders acted to stop it.

A bill currently making its way around the U.S. House of Representatives, the ‘Currency Reform for Fair Trade Act,’ would allow businesses to file trade cases based on injury from China’s currency manipulation. Passing it would produce immediate results. Even the hint of action on currency manipulation causes shudders in the Chinese politburo...
Like it or not, such language is going to resonate well among large parts of the US electorate, especially given the painfully slow economic (and in particular manufacturing) growth. This issue will become center stage among many politicians as elections approach and the yuan appreciation policy remains on hold.
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