China Economy

A New Option

There is one, directly monetary, measure that the United States should contemplate taking against China: direct purchases of renminbi to counter China’s direct purchases of dollars. It is absurd, especially from a US national perspective but also from the standpoint of global financial stability, that other countries set the exchange rate of the dollar. This is a consequence of the international role of the dollar, one of several of which lead me to question whether that role remains in the national interest of the United States.

In principle there could be little objection to such “countervailing currency intervention” against manipulation by another country that was keeping its exchange rate substantially undervalued as a result. In practice, the United States could easily adopt such a policy against any currency that is generally convertible, such as the euro if it too became substantially undervalued (as appeared to be occurring several months ago).

The United States has of course bought foreign currencies on many past occasions, most recently the euro in 2000 and the Japanese yen in 1998. Those interventions were taken in close coordination, and via joint market operations, with the issuer of the other currency at its request because they believed (and the United States agreed) that it had become too weak. It would be very different for the United States to intervene against the desires of another country, especially to counter its intervention, but the market techniques would be identical. Moreover, the objective would be to push a specific exchange rate toward equilibrium levels and thus to reverse a misalignment that was distorting global trade and the world economy.

There is a practical problem in the Chinese case. The absence of full convertibility for the renminbi, and the existence of widespread Chinese capital controls, make it impossible for the US authorities to enter well-functioning currency markets (as for the euro or yen) to buy...