US-China Commission Report - Fatal System Error

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principal and interest payments on such a large debt. The total federal
debt burden of $10.2 trillion already is having a significant impact
on economic growth, which will only increase in severity. 13
While currency manipulation has been a useful tool in supercharging
China’s export machine, the practice has begun to cause
problems for China’s policymakers, including a persistent inflationary
spiral. In simple terms, maintaining a low value for the
RMB means that Chinese exports will be cheaper than they would
be if the price of the currency were determined by market forces.
The result is that Chinese goods are cheaper in the United States,
and U.S. exports are more expensive in China, which provides
China with an effective export subsidy and an incentive for U.S.
companies to move their production to China. This problem also
confronts U.S. exporters in other markets where they compete
against Chinese products.
Economists’ estimations of the degree to which the RMB is undervalued
vary. The Peterson Institute for International Economics,
for example, said in July 2008 that the RMB was still undervalued
against the dollar by about 30 percent, even after the RMB
had appreciated over 18 percent since moving to a ‘‘managed float’’
in July 2005.* 14 In contrast, most developed nations allow their
currency to be traded on the open market and intervene only occasionally
to try to temporarily influence short-term price swings.
Some of China’s Asian neighbors also keep their currencies undervalued
against the dollar so as to remain competitive with China
on exports. As China has done, Hong Kong, Taiwan, and Malaysia
have purchased U.S. dollars in an effort to control the value of
their currencies.
Beijing’s tight management of the RMB involves the People’s
Bank of China issuing massive amounts of RMB-denominated
bonds. First, the Chinese banks exchange dollars and other foreign
* Under considerable pressure from the U.S. administration and Congress, China has taken
some small steps in this direction, all the while claiming that the government will not respond
to pressure. In July 2005, China engineered a 2.1 percent overnight rise in the value of the RMB
and announced a policy that would allow a ‘‘managed float’’ of the RMB within a very narrow
daily trading band of 0.3 percent.