Source: Federal Reserve: Yuan, Broad dollar index.
Everyone knows this is happening. Treasury Secretary Timothy Geithner even used the word "manipulating" with the Senate Finance Committee mere hours before it voted to recommend his confirmation.
The dollar exchange with China "defies the laws of monetary physics." During this U.S.-led global recession, dollars aren't worth as much as they once were. The natural physics of exchange makes U.S. goods relatively less expensive for others to buy, but makes foreign goods more expensive for Americans to buy. In a free market for currency, that would help bring accounts back into balance.
But China doesn't obey those laws. China's deliberate policy of pegging the Yuan to the dollar makes American imports of Chinese goods artificially cheap and gives American companies opening factories in China an artificial subsidy. That's good for China but bad for America, and helps explain our soaring trade imbalance with China. An extraordinary 83 percent of America's non-oil trade deficit is with China. During the downturn, our trade deficit with other countries has been shrinking -- but not with China.
The G-20 summit in Pittsburgh in September concluded with a joint statement to seek "more balanced growth as part of the global economic reconstruction." The entire G-20 signed on -- including China -- but China's name was in bold in the quest for "balance," and everyone knew it.
Now America's high level trip to Asia opens with a joint op-ed written by our own Timothy Geithner along with the finance ministers of Indonesia and Singapore. They repeat the goal of "strong and balanced growth" and expressly state that "Market-oriented exchange rates in line with economic fundamentals will be essential."
China seems to be paying attention. In its third-quarter monetary policy report, the People's Bank of China suggested that it might consider other major currencies, not just the dollar, in guiding the exchange rate. That's not quite a free market float, but it's better than the dollar peg.
In the American heartland the issue isn't exchange rates, of course. The issue is jobs. American workers can compete dollar for dollar against Chinese workers. They can't compete dollars against manipulated Yuans.
The path back to prosperity goes through the Chinese Central Bank. Let's hope Barack Obama remembers who he's working for.
This post originally appeared at the Campaign for America's Future.