September 30, 2016
A headline of a NYT business section piece confidently told its readers that “China manipulates its currency, but not in the way Trump claims.” The gist of the argument is that China has recently sold off some of its foreign exchange reserves in order to raise the value of its currency. It goes on to assert that because the inflow of foreign investment into China has slowed, its currency should fall if left to market forces.
Actually, China still holds well over $4 trillion in foreign reserves counting the money in its sovereign wealth fund. Given standard rules of thumb, a country with China’s level of imports would be expected to hold between $500 billion and $1 trillion in foreign reserves. These additional holds of reserves have the effect of keeping down the value of China’s currency, just as Donald Trump claims. (I will not vouch for the fact that this is what Trump is thinking when he complains about currency management.)
It is also worth noting that even though China’s economy has slowed, it is still growing far faster than the economies in Europe, Japan, and the United States. This would be expected to lead to an inflow of capital to China, which would correspond to China running a trade deficit. Instead, China is continuing to run a trade surplus of between 2–3 percent of GDP.
In short, Trump is much closer to the mark on this one than the NYT.
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