Source: Federal Reserve: Yuan, Broad dollar index.
The dollar stays flat against the Chinese Yuan, even as it loses value against other major currencies. The dollar is down to $1.50 per Euro, compared to $1.27 at this time last year (sorry to folks daydreaming about summer in Italy). But the dollar is unchanged against the Yuan (unless one considers 6.836 to 6.827 a drop).
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.
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 wheels of change are starting to turn. The Obama administration stood up to China when it imposed tariffs on Chinese tires and pipes dumped in the U.S. markets. The chattering class called it a trade war, but it's not. It's just applying the same rules of free trade that other countries respect, and that China agreed to when it entered the G-20 and was granted permanent normal trade relations with the US. Obama just blew the whistle.
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.