In last night's US Presidential Debate, Mitt Romney labeled
China "a currency manipulator" when speaking about foreign policy
and how to improve the manufacturing atmosphere in America.
Is China a currency manipulator, and what would it mean for the US
Dollar if Romney were elected?
China's Yuan is in a "controlled peg" relative to a basket of
currencies. They control the exchange rate of their currency
by purchasing the currencies of other countries, including the US
Dollar, and many argue that the Chinese are buying a
disproportional amount of dollars in order to keep their currency
at a rate lower than it would be in a free market. This would
allow them to produce (and sell) products cheaper as exports.
If this is true, then there prevailing reason would say that
China (NYSEARCA:FXI) could be "stealing" manufacturing jobs from
the United States by attracting companies with cheaper costs than
would otherwise be available under freer market
circumstances. However, prevailing wisdom may be wrong.
Is the Yuan being manipulated?
As with most economic debates there are two or more differing
opinions on the topic, but the majority of opinions is that the
Chinese currency is undervalued. Some measurements that
support such claims are the popular "Big Mac Index", the
International Monetary Fund's analysis, as well as academia's
purchasing power parity studies.
The Big Mac Index, which was popularized by The
Economist
magazine, measures the prices of a Big Mac burger in McDonalds (
MCD
) around the world adjusted for exchange rates. A Big Mac in
China in July 2012 costs an equivalent of only $2.45. The
average price in the United States is $4.33. This implies
that the Chinese Yuan is undervalued by a little over 40% based on
purchasing power parity.
The
IMF
as well as some academic
studies
also support that the Yuan is being undervalued between 30 and
50%.
Who is Correct, Romney or Obama?
President Obama rebutted Romney's accusation that he was soft on
China claiming, "as far as currency manipulation, the currency has
actually gone up 11 percent since I've been president because we
have pushed them hard. And we've put unprecedented trade pressure
on China (NYSEARCA:GXC). That's why exports have significantly
increased under my presidency. That's going to help to create jobs
here."
The chart below shows that Obama is correct in the short term
and Romney is correct over the long term. China's pegged
currency has devalued significantly since its lows just above
1Yuan/Dollar in the early 80's to a high of above 8 Yuan/Dollar in
2006.
Since 2006 the Yuan has strengthened about 26%, and since Obama
took office in 2009, the Yuan has increased in value around 11%
from just over 7 Yuan to just over 6 Yuan per Dollar.
Currencies (NYSEARCA:FXE) are always measured relatively, so a
strengthening Yuan implies a weakening US Dollar
(NYSEARCA:UUP).
Election Potentials
If Governor Romney is elected it sounds like he will pressure
the Chinese to continue to strengthen their currency. If
China's currency strengthens, prevailing wisdom is that the US
Dollar will be a beneficiary by devaluing. If theUS Dollar
devalues then US goods become cheaper relative to other countries
and manufacturing picks up as other countries demand our goods, or
at least economic theory would teach.
If Obama is re-elected it sounds like a similar outcome is
expected as Obama debated that the 11% strengthening of the Yuan
was a result of his policies. He also likely will continue to
pressure the Chinese to strengthen their currency.
To take advantage of a devaluing dollar, the bearish PowerShares
DB ETP (NYSEARCA:UDN) moves inversely to the US Dollar. The
Wisdom Tree Dreyfus Chinese Yuan Fund (NYSEARCA:CYB) takes
advantage of a strengthening Yuan.
But will a devaluing US dollar really help jobs?
Currency Devaluation does not Drive Manufacturing
Jobs
Against prevailing thought, academia theory, and economic
studies, a declining US currency is not correlated with an increase
in manufacturing jobs, at least not in the last 30 years. In
fact quite the contrary.
The below chart shows the US dollar since 1980 along with the
St. Louis Fed's Manufacturing Employment Data since 1980.
Together they sum up the manufacturing jobs debate quite
nicely.
Both candidates are wrong in their assumptions about the US
Dollar and manufacturing jobs. Since 1980 the US Dollar has
been in a long-term devaluation. Based on the candidate's
logic, that would imply manufacturing jobs should be increasing in
America. That simply has not been the case.
Even more so, since around 2002 (red shaded boxes), that decline
in the dollar's value has picked up speed, yet manufacturing jobs
still continued to decline, significantly.
There is very little support that a declining US currency
amounts to more manufacturing jobs. If anything, the analysis
shows that a stronger dollar actually may be a better policy for
attracting manufacturing jobs. In the 90's the dollar
strengthened and so did manufacturing jobs. More recently
since 2009, the dollar also has stabilized and so have
manufacturing jobs.
Both Obama and Romney are wrong when it comes to China's
currency manipulation and its role in the loss of manufacturing
jobs in America. For the past 30 years a declining dollar value has
not increased the amount of manufacturing jobs in the United
States. What makes them think it would work this time?
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