Is China a Rogue Nation? Thoughts on a fixed currency system.

Ok, I'll admit, rogue nation isn't precisely accurate. But by staying outside the international community and maintaining a fixed currency China risks being labelled a currency manipulator something which we (the world) all want to avoid.

Currency Since the Second World War.

Currency is a complicated topic, and many nations see the strength of their currency (not in value but in prestige sense) as directly tied with their sovereignty. It is not accident that the preeminent power since the Second World War, the United states, has enjoyed the dollar being the de-facto trading currency of choice. The US was able to use the strength of the dollar to push multilateral free trade agreements and in an age of the Cold War push capitalism successfully across the globe.

Since 1973 with the end of the gold tied Bretton Woods system, most western nations have allowed their currencies to float, that is allowed their currencies to be traded on the foreign exchange markets. This is crucial as freely floating currencies promote market efficiency, money flowing in and out of the economy doesn't need to be accounted for by the central government. Furthermore a freely floating currency reduces the need for government intervention in the financial markets (the price of currency doesn't need to be set) which is always a positive.

Having a freely floating currency also reduces the need to physically back your currency, so long as your currency remains stable there is no need for the central bank to provide surety in the form of gold or other valuables.
Admittedly the system isn't perfect, a floating rate can be highly volatile, causing headaches for financial markets as the going rate for a particular currency fluctuates widely, especially in times of crisis.

This is What has Happened in China

The Renminbi (the official term for China's currency which is still split into Yuan) whilst being tradeable on the foreign exchange markets, and having some level of flexibility attached to it-the value is allow within a few percentage points of a the value of a basket of foreign currencies- the value of the Yuan is carefully controlled by the Chinese government. The Yuan is hence essentially a fixed currency. This is important as it has aided China's growth by encouraging its export sector to flourish. It is no accident that China is the largest exporter in the world.  

Ok? But this doesn't really sound like an issue. 

Many countries rightly see a fixed exchange rate as an attack on free trade, disadvantaging their own manufacturing sectors and causing markets to move to China. Until recently the US was the granddaddy of pushing free trade. Trump in his contract with the American Voter promised to instruct his "Secretary of the Treasury to label China a currency manipulator." This means that America could be pushing for a potential trade war with China. Or diplomatic stoush as the Americans seek to prop up their fading manufacturing sector, and the Chinese seeking to maintain their growth. Furthermore this goes back to what I mentioned about countries seeing their currency being tied to their sovereignty. 

The Future

China is unlikely to give up one of its major engines for economic growth, and whilst it has striven to allow a greater level of flexibilty in the going rate for the Yuan, backdown on this issue may be politically impossible due to the growing strain in Sino-US relations. The United States and China becoming economic enemies could be calamitous not just for the economy, but for the world.