Peterson Institute publications
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
RSS News Feed Search


We Can Fight Fire with Fire on the Renminbi

by C. Fred Bergsten, Peterson Institute for International Economics

Op-ed in the Financial Times
October 4, 2010

© Financial Times

China continues to manipulate the renminbi to the extent that it is now undervalued by at least 20 percent. Japan has resumed intervention on a massive scale to lower the yen. Switzerland recently spent more than $100 billion to keep its franc from rising. All these countries, and a number of others, already run large trade surpluses and hold huge reserves but nevertheless want to weaken their exchange rates to boost growth through exports.

Now some deficit countries, notably Brazil, feel compelled to emulate these interventions to defend their competitive positions, even though they too already hold large reserves. Virtually all economies, including the European Union and the United States are seeking to avoid stronger exchange rates. In short, the competitive undervaluation of China is infecting the entire global economy.

This exposes a glaring gap in today's international monetary system: the absence of effective discipline on surplus countries. All adjustment pressures fall on those with deficits—resulting in an inherent deflationary bias that is especially acute during global slowdowns. The International Monetary Fund (IMF) was set up to stop the competitive devaluations that deepened the Great Depression, but it has never been given the tools to do so.

The United States suffers especially from this shortcoming. Other countries can set the dollar exchange rate, by intervening to hold its price up and their own currencies down, as China has done by buying a daily average of $1 billion for the past five years. IMF guidelines call on member countries to take into account the "interests of other members, including those of the countries in whose currencies they intervene," but there is no indication that those intervening ever do. Europe will increasingly face a similar problem with greater international use of the euro, while Japan already complains about China's operations in yen.

This gap can be filled, however, by the introduction of a new policy instrument: countervailing currency intervention. When China or Japan buy dollars to keep their currency substantially undervalued, the United States should sell an equivalent amount of dollars to push back. The IMF should authorize such intervention when necessary to discipline countries that are violating their obligations by engaging in deliberate undervaluation.

The traditional trade policy tool of countervailing duties against illegal export subsidies is a useful model. When World Trade Organization (WTO) members violate commitments not to subsidize, importing countries can apply offsetting tariffs. While subject to occasional abuses, the procedure works reasonably well. The US House of Representatives last week passed a bill to treat deliberate undervaluation as an export subsidy, as it surely is, and to authorize countervailing duties. However, a currency misalignment affects all of a country's foreign sales, not just specific sectors, and all imports, too. So countervailing duties are inferior to a monetary response.

The United States has, of course, bought foreign currencies for dollars on numerous occasions. It purchased euros in 2000 and yen in 1998, when it was widely agreed that those currencies had become far too weak. The most important interventions came in 1985–87, under the Plaza agreement, when the United States bought German marks and yen to help correct an overvalued dollar. But these were carried out with the cooperation of those involved, whereas a countervailing intervention would punish a country that was deliberately undervaluing its exchange rate. Hence the target country should be able to appeal to the IMF, if it thought it could make a persuasive case that the new tool was not being used to promote widely agreed systemic objectives.

In the case of China there would also be technical problems. The renminbi is inconvertible for capital flows, hence proxies would have to be found such as renminbi futures contracts and debt instruments. This would probably limit the scope of counterintervention well below the magnitude of Chinese dollar purchases. But the message would be unmistakable. Private capital would flood into China, around its capital controls, and push the currency upward as needed. More importantly the principle is clear: The new policy instrument would fill a major gap in the global monetary system and reduce a substantial threat both to financial stability and open trade.


Book: Bridging the Pacific: Toward Free Trade and Investment between China and the United States October 2014

Policy Brief 14-21: Is China's Property Market Heading toward Collapse? August 2014

Policy Brief 13-16: Preserving the Open Global Economic System: A Strategic Blueprint for China and the United States June 2013

Working Paper 12-19: The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go? October 2012
Revised August 2013

Policy Brief 12-7: Projecting China's Current Account Surplus April 2012

Book: Sustaining China's Economic Growth after the Global Financial Crisis January 2012

Book: Eclipse: Living in the Shadow of China's Economic Dominance September 2011

Op-ed: For a Serious Impact, Tax Chinese Assets in the United States October 13, 2011

Op-ed: Taxing China's Assets: How to Increase US Employment Without Launching a Trade War April 25, 2011

Op-ed: Why the World Needs Three Global Currencies February 15, 2011

Policy Brief 10-26: Currency Wars? November 2010

Testimony: Correcting the Chinese Exchange Rate September 15, 2010

Policy Brief 10-20: Renminbi Undervaluation, China’s Surplus, and the US Trade Deficit August 2010

Book: China's Strategy to Secure Natural Resources: Risks, Dangers, and Opportunities July 2010

Testimony: China's Exchange Rate Policy and Trade Imbalances April 22, 2010

Policy Brief 10-7: The Sustainability of China's Recovery from the Global Recession March 2010

Testimony: Correcting the Chinese Exchange Rate: An Action Plan March 24, 2010

Paper: Submission to the USTR in Support of a Trans-Pacific Partnership Agreement January 25, 2010

Paper: China Energy: A Guide for the Perplexed May 2007

Book: US-China Trade Disputes: Rising Tide, Rising Stakes August 2006

Working Paper 11-14: Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition September 2011

Testimony: A Muscular Multilateralism to Engage China on Trade September 21, 2011

Peterson Perspective: Legislation to Sanction China: Will It Work? October 7, 2011