Ed Dolan's Econ Blog

“Truth Teller” Donald Trump Fudges the Facts about Chinese Currency Manipulation

Donald Trump is surging in the GOP primary polls, partly on the basis of a carefully crafted reputation for telling it as it is. Even rival Ted Cruz thinks Trump is “teriffic” and “brash,” saying, “I think he tells the truth.” But when he comes to China’s exchange rate policy, he is about as far from the truth as he could get.

Last week Jake Tapper, host of  CNN’s “State of the Union,” interviewed Trump on a wide range of issues. It wasn’t long before the conversation turned to trade, jobs, and China. “You have to take the jobs back from China” before you can even begin to solve problems like the national debt and healthcare, Trump asserted.

Tapper slyly pointed to a Trump necktie he had put on for the occasion. “Isn’t it hypocritical of you to talk about this,” he asked, “while you’re manufacturing your clothes in China?”

“Not at all,” Trump replied. “A lot of them are made in China, because they’ve manipulated their currency to such a point that it’s impossible for our companies to compete with them.”

So, does China really manipulate its currency? Can we blame China for the lack of American competitiveness? We’re going to hear a lot about Chinese currency manipulation before this presidential campaign is over, so it might be a good idea to do some fact checking right at the outset.

Yes, China is a “currency manipulator” in the narrowly technical sense that it uses monetary policy to influence its exchange rate. According to the IMF, so do more than half of the other countries in the world—friendly countries both rich and poor like Switzerland, Bulgaria, Costa Rica, Kenya and dozens of others. Having a fixed exchange rate, or one that is allowed to float only within a managed range, is entirely consistent with the agreed rules of international trade.

When politicians call China a currency manipulator, though, they have something else in mind. They claim that China consistently holds the yuan so far below its fair market value that even the best managed American companies could not compete if they tried.

A few years ago, in the immediate aftermath of the global economic crisis, that charge did have a degree of credibility. China had abandoned its previous policy of allowing its currency to appreciate gradually against the dollar and returned to a fixed exchange rate. By early 2010, US economists were estimating that the yuan was 20 to 40 percent undervalued—a margin wide enough to have a significant effect on the competitiveness of US exports.

However, Trump and others who still make the charge of currency manipulation have not been watching the numbers over the past five years—or if they have, they are hoping their listeners have not. Since June 2010, the yuan has once again been steadily gaining in value.

True, in nominal terms, as measured against the dollar alone, the appreciation has been modest, only about 6 percent over five years. The nominal yuan-dollar rate doesn’t tell us much, however. What counts for competitiveness is the real effective exchange rate. That rate differs from the nominal yuan-dollar rate in two ways: First, it takes into account the currencies of all of China’s trading partners—the EU, which is the single largest, countries like Brazil and Australia, which supply its natural resources, and all the rest, including, of course, the United States. Second, the real effective exchange rate takes inflation into account. Inflation has been pushing Chinese wages rapidly higher relative to those in the United States and other Western countries. Inflation, it turns out, has had a much bigger impact on competitiveness than movements in nominal exchange rates. (For more on real vs. nominal exchange rates, see this slideshow.)

The following chart gives the numbers. In contrast to the modest rise in the nominal yuan-dollar rate, China’s real effective exchange rate has soared 30 percent over just the last four years. The supposed 20 to 40 percent undervaluation is a thing of the past.


Not surprisingly, as China’s currency has appreciated, its once-phenomenal trade surpluses have dwindled. The next chart shows that the current account balance, the broadest measure of those surpluses, has fallen to just a fifth of its level before the global crisis.


But here is an even more curious development—one that really undercuts the accusations of Trump and others. Although the Chinese government does continue to intervene in foreign exchange markets, it has recently devoted its efforts to boosting the value of its currency, not to holding it down. It does so by selling off foreign exchange reserves in order to mop up what it sees as an excess supply of yuan. The Wall Street Journal reports that in the first three months of the year, China’s foreign exchange reserves fell by more than $100 billion—a record for a single calendar quarter. The government is, of course, aware that a strong yuan, combined with rising Chinese wages, is eroding its once fearsome competitiveness, but it apparently has an even greater fear: A falling yuan might provoke massive capital outflows that could further slow the growth of GDP.

The bottom line: Donald Trump, not China, is the manipulator—a manipulator of the truth.

Related posts:

Real and Nominal Exchange Rates: A Tutorial

Who are the Biggest Trans-Pacific Currency Manipulators?


26 Responses to ““Truth Teller” Donald Trump Fudges the Facts about Chinese Currency Manipulation”

CbryantJuly 7th, 2015 at 9:21 pm

Your analysis is even worse than Donald Trumps. Mr. Trump’s comments concern decades of experience dealing with China, and you pull out the last 4 years. That in itself is a misrepresentation. Even at that, if you performed the same analysis with Japan, it wouldn’t hold water. Your analysis includes the broad basket of indices that include 61 countries instead of the narrow indices of the 27 major economies. The net effect is to make China’s appreciating yuan look higher than when its compare with major trading partners. Further to the subject, I you own a solar panel company in the US, You could care less about China’s world-wide competitiveness. It’s solar panel to solar panel. It’s Bilateral.

Your forex comment, which you say is most damning of Mr. Trump’s duplicity, is so lacking in perspective, it can only be characterized as misleading. You fail to mention, that the reserves have been pulled out to fund Silk Road investments. You fail to show the perspective of how they held almost 4 trillion in reserves and cannot take more on. You do not mention the connection to gold, China’s desire to achieve global reserve status, and their eventual desire to replace the dollar as the go to currency. This is a complex subject and I would rather have Donald Trump in charge of these future negotiations than any other candidate that probably has no idea the real impact of sovereign debt and a Chinese Sovereign Wealth Fund which is exactly where the US debt is heading.

Ed Dolan dolaneconJuly 8th, 2015 at 11:07 am

Thanks–I always appreciate it when readers take the time to comment in detail. Let me reply to a few of your points.

(1) You say, "Mr. Trump’s comments concern decades of experience dealing with China, and you pull out the last 4 years. That in itself is a misrepresentation. "

I tried to make it clear that the charge of currency manipulation (to the extent the term has any real meaning) had some credibility in the past. Yes, there were periods in the past 30 years when China's fixed exchange rate policy, and later crawling peg, did appear to have the intentional effect of keeping the yuan weak to promote exports. My point is that the situation has changed significantly in the past 5 years, so why is Trump still ranting about a policy that is now part of economic history? Why does he say (as he does further in the interview) that he will stop China's currency manipulation if elected, when China has already stopped it on its own?

(2) You say, "Even at that, if you performed the same analysis with Japan, it wouldn’t hold water " I wonder if you followed the link at the end to my earlier post, "Who are the Biggest TransPacific Currency Manipulators?" That post does analyze Japan and contrast it to the Chinese case. I would be interested in your comments on that one, too.

(3) You say, "Your analysis includes the broad basket of indices that include 61 countries instead of the narrow indices of the 27 major economies."

Are you looking at the same source I am, the BIS tables? [|1… ] When I look at the narrow (27 country) table, I don't see an entry for China, just Chinese Taipei and Hong Kong. Even if the data were there, it seems to me that the broad index is the relevant one. After all, if we are looking for relationships to other data–for example, to the current account–those other data comprise trade with all partners, not just the 27 largest. Furthermore, remember that the 61-country sample is an average that is weighted by trade shares, so the exchange rates of little partners don't have much effect on it anyway.

(4) You say, "if you own a solar panel company in the US, You could care less about China’s world-wide competitiveness. It’s solar panel to solar panel. It’s Bilateral."

Yes, I agree that it is the bilateral rate that matters for a US solar panel maker. However, currency manipulation plays a small role, if any, in the solar panel case. Yes, the nominal yuan-dollar rate has changed little, but that is partly because the dollar has been appreciating at the same time the yuan has been, largely for unrelated reasons such as the impending end of quantitative easing. Also, remember, it is the real bilateral rate that affects solar panel trade, not the nominal rate. Even on a bilateral rate, the yuan is appreciating faster against the dollar in real than in nominal terms, largely because the rate of increase in wages is faster in China than in the US. Then too, remember that China could not independently manipulate the bilateral rate even if it wanted to. Its purchases or sales of reserves, even reserves denominated in dollars, affect exchange rates relative to all of its partners. That is guaranteed by currency arbitrage. Finally, as I understand it, the big issue in solar panels is not the exchange rate, but allegations of illegal Chinese subsidies and other forms of "dumping."

(5) You say, " You do not mention the connection to gold, China’s desire to achieve global reserve status, and their eventual desire to replace the dollar as the go to currency."

I don't think gold has anything to do with anything here, but China's desire to achieve reserve status for the yuan may well be a factor. I think it is one of the reasons that China is now reluctant to let the yuan depreciate. So, in that sense, it is a factor that strengthens my argument–China is no longer manipulating its currency downward as it did in the past.

Gary StegenJuly 10th, 2015 at 12:32 pm

The real issue is persistent large trade imbalances, which have caused and are causing significant economic problem in the US, Europe, and elsewhere. Currency manipulation is only one of many contributors to these imbalances, but has been identified in many peoples mind as “the villain” that is causing the problem. The author is right that simply addressing “currency manipulation” is difficult at best and does not address the real problem. However, he offers no solution to the trade imbalances.
A better approach is to handle the imbalances directly. Persistent trade/current account surpluses occur when a country is successful at exporting but does not spend its export earnings. The difference represents excess savings of the country which must then be exported to the deficit countries either as loans/debt, purchase of assets of the deficit countries, or (less frequently) as direct investment. Any policies that affect the net value of savings minus investment in a country will indirectly affect the country’s current account surplus (see for example… ). Picking out currency exchange rates alone does not consider the many other factors a country can “manipulate” to increase or decrease its savings net of investment and/or current account surplus. Rather than attempt to determine if a currency is undervalued or manipulated the more appropriate indicator is the current account balance, i.e. a significant current account surplus that persists (on average) over a long period of time (say 5 years or more) is a clear indicator that a country has a trade issue.
Another question is how to label a country with this trade issue? A negative sounding label could be picked, for example: currency manipulator, trade manipulator, trade abuser, mercantilist, beggar they neighbor, money hoarder, etc. Or a more positive sounding label could be picked, such as: persistent surplus country, thrifty, financially prudent, or excess saver. For now, I will use the term “Excess Saver.”
My first suggestion is that in existing law that requires the US President to report on potential “currency manipulators” that the terminology be changed from currency manipulator to “Excess Saver.” Then the President would periodically report to congress the list of Excess Saver countries. This should be pretty much automatic, i.e. unless there is a specific exemption a country would be labelled an Excess Saver if its average current account surplus exceeds a trigger value (say 1% of GDP averaged over the last 5 years). There might even be additional categories such as 0.5% average surplus called Prospective Excess Savers. Exemptions would be limited and specific, for example: countries paying down a large net external debt; countries whose exports consist of primarily nonrenewable commodities (e.g. oil or minerals), countries that need to build up clearly inadequate reserves, and possibly countries that have been specifically granted a temporary exemption by an act of Congress.
Actions taken when Excess Savers are identified could be referred to as trade sanctions, e.g. tariffs, quotas, non-tariff barriers, domestic production preferences or subsidies. However, I prefer to call them “trade assistance,” that is actions to assist the excess savers in developing the wherewithal to spend their excess export earnings. Spending the excess export earnings internally would generally stimulate their domestic economy and increase employment and the standard of living of the average person. However, it is often opposed by powerful constituencies, so that providing some “trade assistance” to help overcome this resistance can be important. For example initial tariffs on manufactured goods of 10% and 20 % could be applied to imports from ExcessSavers with average current account surpluses of 1 to 3 % of GDP respectively. These would be increased by 5% per year until reasonable trade balance is achieved. Quotas and selective import embargoes could also be considered. For Prospective Excess Savers (>0.5% average surplus) a letter would be sent to congratulate them on their success in selling their exports, and to remind them that to maintain relatively open access to our markets they are expected to spend their export earnings. If they have difficulty spending the money and achieve the Excess Saver level we will start providing them with “trade assistance” to help in overcoming those difficulties.

Ed Dolan dolaneconJuly 10th, 2015 at 8:03 pm

You present a very interesting point of view here, and as far as the analysis goes, I don't think I have any major issues. What I find odd, though, is the implication that "excess savers" are the bad guys, and that the rest of us have to take some actions to police and punish "excess saving."

My simple question is this: Given your analytical framework, which I think is correct, why not call countries like the US "deficient savers?" Why take this mercantilist framework that casts countries with trade surplus as the winners and countries with trade deficits as the losers?

Really, in a sense, aren't the countries with trade deficits the real winners? They (I mean we, I guess) are the ones that enjoy a lot of cheap imported stuff, which raises their standard of living (at least in the static perspective) while exporting nothing but promises to pay sometime in the future (bank loans, bonds, reserve currency balances, whatever.)

Gary StegenJuly 11th, 2015 at 5:02 pm

Thanks for responding to my comment. This is a complex multidimensional topic that cannot be adequately covered in a few brief sound bites. I offer some brief thoughts below on the questions about winners and losers. Due to size limitation this is broken into multiple pieces.

Gary StegenJuly 11th, 2015 at 5:02 pm

RE: “Winners and losers.” Consider the near term or steady state effects of balanced trade versus persistant surpluses and deficts (leaving aside for now the consequences of financial instabilities resulting from the debt buildup and eventual end or reversal of unsustainable capital flows). Within each surplus and deficit country there are both winners and losers. Is the overall average citizen of each group a winner or a loser? The answer to this question is complex and situational, i.e. there could be situations where the answer is “winner” and others where it is “loser.” The answer also must consider if it is a winner or loser as compared to what? The following provides a few very simplified examples to illustrate potential overall winners and losers.
As shown in the post, China has had a large current account surplus for the last 15 years. The surplus represents excess savings that are not used for investment or consumption within China. Most of these excess savings are loaned to other countries, for example by buying US treasury bonds. A fraction of the excess savings are also used to buy real assets of other countries via a sovereign wealth fund or via purchases by Chinese companies or individuals. Two simple scenarios illustrate potential effects if the current account is brought into balance (i.e. China spends all of its export earnings).

Gary StegenJuly 11th, 2015 at 5:04 pm

1.Free trade scenario, assumes that China continues to export freely as they have been. There are a lot of mechanisms China could use to reduce the trade imbalances. For this scenario it is simply assumed that a set of government policies are implemented that directly or indirectly cause all of the excess savings to be spent within China on things expected to benefit the people of China. There are lots of options for how they might spend the money, ranging from grandiose government projects to increasing income of Chinese households to spend themselves. You could look at this as China (government) taking the excess savings of China (people and businesses) and causing it to be spent to benefit China (people).

What are the effects on China? Two things seem fairly obvious; first, the overall average standard of living in China goes up, and second, the additional demand stimulates the economy of China. This stimulates additional production and income within China, assuming they have additional production capacity. The new demand is therefore satisfied by a combination of increased imports, previously exported production being directed inward, and new increased production. The new increased production (multiplier effect) means that to achieve balanced trade the actual spending within China must increase more than indicated by the past current account surplus data. What about the long term effects? China is no longer accumulating claims on (debt of) other countries, and is no longer able to buy up large amounts of the assets of other countries. To judge the value of those future claims compared to increased current consumption, investment, production and general standard of living for the balanced trade case one would need to understand when and how they expect to collect on those claims. I have no idea how they expect collection of these claims to pan out; however, my judgment is that they are far better off to have the increased internal production, investment, and consumption in the near term versus pursuing a vague future collection of money owed to them.

Gary StegenJuly 11th, 2015 at 5:13 pm

What are the effects of the free trade scenario on the deficit countries? The answer to this is perhaps even more complex and situational than for the surplus countries. Total worldwide current account balances must sum to zero, so by definition if the surplus countries reduce their surpluses to zero then the deficits are also forced to zero. If the economy of a deficit country is essentially running a full capacity and it needs imported capital to support productive investment and growth then a persistent deficit could be a benefit. These conditions have occurred historically, but do not appear to have been present in developed countries in recent decades. If the economy of a deficit country is near full capacity and the deficit represents excess consumption or non-productive investment (e.g. housing) then one might conclude the deficit is beneficial because it increases the average standard of living for a period of time. However, this is only temporary and is at the cost of an unsustainable debt buildup that must eventually stop or reverse (think Spain, Greece, etc.). If the deficit country has surplus unused capacity the current account deficit is likely to increase the surplus capacity resulting in unemployment, shutdown factories, reduced government tax revenue etc. This condition has been more typical of the developed countries in recent decades.

Relative to the China balanced trade scenario above there will be winners and losers within the US, but my judgment is that overall it is a significant winner for the US. The trade deficit has been running about $500 billion/yr or about 2 ½% of GDP. Trade balance could be achieved with roughly a 10% reduction of imports and a 10% increase in exports. For US manufacturers to replace the reduced imports would appear to require an increase in their realized selling prices for selected products (based on the assumption that they are not making and selling US made products because it is not profitable at current realized selling prices). Thus it is safe to assume that some consumers are going to pay more for some products to facilitate the rebalancing. Reduction in consumers standard of living resulting from increased prices for some items seems to be the primary basis for the “loser” arguments. However, there are offsetting “winner” effects. Clearly the changes tend to stimulate manufacturing, creating direct manufacturing jobs and additional jobs for support services, suppliers, construction, and infrastructure. Additional income flows to the added workers, to the factory owners/investors, state and local taxes, federal taxes on the additional income, etc. There are additional multiplier effects as the added income is spent in the economy. Closing the trade gap could easily add several percent to GDP while increasing government revenues and reducing the budget deficits. Elimination of a 2 ½% trade deficit should require an increase in manufacturing activity on the order of 25%. I do not know the level of price increases needed to stimulate this magnitude of increased manufacturing, but it does not seem likely to be huge. The increased domestic production would have the effect of increasing per capita GDP and hence the average standard of living. Quantitative calculations are not available to determine if this is sufficient to offset the standard of living loss associated with increased import prices. However, my judgement is that the US would be a clear winner in this scenario.

Gary StegenJuly 11th, 2015 at 5:14 pm

2.Restricted trade scenario. In this scenario balanced trade is also achieved. It is accomplished primarily by the deficit countries restricting access to their markets sufficiently to reduce imports to the level of exports. Typical actions could include high tariffs, quotas, embargoes and/or subsidizing manufacturers to support import substitution. Retaliation by surplus countries may also result to attempt to reduce their imports. This is essentially a protectionism/trade war scenario. While both the surplus and deficit countries may be losers in this scenario the impacts to the surplus countries appear to be much larger. The reduction exports causes a reduction in production and income for the surplus countries. Reductions in imports are not likely to provide much help. The resulting surplus of production may reduce domestic prices providing some benefit for those with jobs, but the overall result appears to be substantially negative. Impacts to the deficit countries with surplus production capacity are less severe. There is likely some loss of exports with negative impacts to the export industries. The increase in prices may be more than in the first scenario since essentially all of the trade imbalance must be made up by reduced imports.
Primary purpose of the graduated tariff proposed in my original comment is to provide the persistent surplus (excess saver) countries with a strong incentive to pursue option 1 (free trade scenario) in order to avoid option 2 (restricted trade scenario).

Ed Dolan dolaneconJuly 11th, 2015 at 8:06 pm

With regard to your first comment (free trade scenario): "There are a lot of mechanisms China could use to reduce the trade imbalances. . . " etc

I agree. I am encouraged to see that the Chinese government seems to be beginning to agree as well. I think the reduction of China's extraordinary current account surpluses of the mid-2000s is not a failure of Chinese policy, but a realization (at least in part) that a reduction in the surpluses is not only consistent with, but necessary for an increase in standards of living.

Ed Dolan dolaneconJuly 11th, 2015 at 8:08 pm

With regard to your first comment (free trade scenario): "There are a lot of mechanisms China could use to reduce the trade imbalances. . . " etc

I agree. I am encouraged to see that the Chinese government seems to be beginning to agree as well. I think the reduction of China's extraordinary current account surpluses of the mid-2000s is not a failure of Chinese policy, but a realization (at least in part) that a reduction in the surpluses is not only consistent with, but necessary for an increase in standards of living. – See more at:

Ed Dolan dolaneconJuly 11th, 2015 at 8:14 pm

With regard to effects on deficit countries, I have two reservations:

(1) I think you put too much emphasis on trade in manufactured goods. Trade in services, energy products, etc. is also important, maybe even more important for US. Even with a completely balanced current account, we would expect the US to be a net importer of manufactured goods, or at least of consumer goods (exporting airplanes, chips, etc)

(2) You say, "Closing the trade gap could easily add several percent to GDP ."

IMHO, this is true only if US is in a deficient aggregate demand (negative output gap) position to start with. Even if it is, other means could be used to close the gap. This is not a sound argument from a macroeconomic viewpoint.

Ed Dolan dolaneconJuly 11th, 2015 at 8:15 pm

With regard to 2: I agree, let's give incentives for free trade. It is the only sound argument for (temporary, tactical) protectionist moves.

MagoAugust 9th, 2015 at 5:19 pm

China manipulates everything on its economy. This enormous bubble in the financial market is just an example, and no matter the governments efforts, china will face a lot of struggles when the bubble finally burst.

TomAugust 11th, 2015 at 9:04 pm

After today's devaluation I think you would have to be deaf, blind and dumb not to recognize China's manipulation of its currency .

Ed Dolan dolaneconAugust 15th, 2015 at 7:12 am

Not entirely. As I mentioned in the post, up until the last few days, China's recent interventions had been in the direction of holding the value of the yuan artificially high, perhaps to slow financial outflows or perhaps to enhance the status of the yuan as a reserve currency or both. In this context, the recent depreciation of the yuan appears to mark an end of the intervention to strengthen the currency rather than an active devaluation. The Chinese government is billing this policy change as a move toward allowing market forces to have more influence on the exchange rate. It is really to early to see if that will be a lasting policy, but the events of the first week are consistent with that interpretation.

bettinaSeptember 28th, 2015 at 6:32 am

Yeah i also heard about it somewhere and the reason behind it was told to be that Chinese just defends themselves with their low currency, they wouldn't survive if they didn't do it. They were also providing some useful information regarding dinarinc and telling about various currency exchanges.