lifestyle leader

In its biannual report to Congress, the US Treasury has criticized China for its 'lack of [currency] flexibility' and record build-up of foreign-exchange reserves. It said these factors risked undermining the progress made in unwinding global imbalances. Critically, though, the Treasury stopped short of officially labeling the country a currency manipulator.

Despite the fact that the FT characterized this as a 'hardening' of language, the report isn't remarkable. For one, the US can hardly afford to challenge the Chinese over the renminbi. Second, what criticism did exist was meant less for the Chinese and more for congressional and European ears. Plus, the renminbi is obviously undervalued and leaving it out of the report would have exposed the administration to fierce domestic politicking. Lou Dobbs, I am looking in your direction.

Anyway, a couple of interesting points are raised by the reemergence of the renminbi issue. First, the US seems to be doing its part in addressing global imbalances. Despite its 'strong dollar' rhetoric, the US is passively watching the dollar depreciate against the major currencies. China, on the other hand, is continuing to stockpile record reserves as it holds down the value of its currency. This keeps its end of the global ledger swollen, and at least partially offsets the gains made on the US account.

Second, there is little immediate incentive for the Chinese to revalue, either through a gradual appreciation or sudden float. The Chinese are chiefly concerned with sustaining economic growth and averting any domestic political turmoil, and thus appear committed to maintaining the export-led model.

Finally, with the Americans reluctant to offend their Chinese overlords, the Europeans are emerging as China's main antagonists re: renminbi revaluation. Dollar depreciation vis-a-vis the Euro extends to the renminbi through its dollar peg. As China's largest trading partner, Europe's, and especially Germany's, competitiveness thus suffers. Unfortunately, the Europeans have even less leverage with the Chinese than do the Americans, and are therefore unlikely to get the Chinese to move, especially with the US on the sidelines.

The stark reality with respect to imbalances is that it all really depends on the Chinese, and they have yet to show a willingness to alter their exchange rate policy or reliance on export-led growth. China talks a big game about its 'peaceful rise' and has desperately wanted the world to recognize its remarkable economic achievements. But as I asked China's representative to the WTO when he spoke at an Economic Diplomacy seminar at LSE, 'When will China assume its rightful place at the table and take a proactive and constructive role in international relations?' It must be said that on critical issues like climate change, Iran and global imbalances, it hasn't (and in case you're wondering, I never got a straight answer, but that's diplomacy for ya).

As The Economist recently remarked, 'The world has accepted that China is emerging as a great power; it is a pity that it still does not always act like one.'