In my view, China’s managed exchange rate system is an intermediary regime that allows a great deal of flexibility to reflect costs and prices, the cyclical position of the economy and external flows of trade and finance. Beijing should not fear accusations of currency manipulations. No world famous New York lawyers, assisted by international economists and highly skilled econometricians, could conclusively prove such a thing. Think of the disputes over time spans of the analysis, price deflators used, etc.
At any rate, allegations of currency manipulation should not be the reason to rush with the opening up of capital account transactions and a swift transition to the free-floating exchange rate. Free trade and trans-border investments are a different story; that part of what the Chinese officials call the “trinity of reforms” can, and should, proceed to prepare the ground for the gradual liberalization of capital flows.
Pushing for new crown jewels of the Chinese economy is an understandable part of celebrating a well-deserved success, but precipitating these events can not only botch the party, but it could also gravely damage China and the rest of the world.
Remember, the world economy needs a world currency that serves as a universally accepted unit of account, means of payment and a store of value. The dollar is the only monetary instrument that can deliver these services on the strength of the U.S. economy and a dollar-based global financial infrastructure.
Not even the solidly managed euro can do all that. Many Europeans, including the French and the Germans, doubt the euro’s finality, and the viability of their epochal project of economic and political unification. Paying for your meal with a euro note could be a problematic thing in most parts of the world, but you could readily settle the bill by flashing the greenback of instant recognition.
As things now stand, China’s apparent impatience with the dollar-dominated world of finance is more a political than an economic issue.
No inordinate amount of empathy is needed, for example, to understand the feelings of China’s President Xi Jinping when President Donald Trump tweets that “I explained to the President of China that a trade deal with the U.S. will be far better for them if they solve the North Korean problem!” China is peremptorily asked to square a circle on American terms. As for the “trade deal,” that’s a story for another day.
