An Urban's Rural View

We Don't Know What It Is, But We're Against It

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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When an art lover from Shanghai bought a painting in New York last November, he captured headlines around the world -- and for good reason. The Chinese man paid $171 million for the piece, an oil by Modigliani titled "Reclining Nude." He put the purchase on his American Express card.

This, needless to say, raised questions. Could anyone, the media wondered, really have a nine-figure credit line on his card? (Apparently yes, though it must give the Amex executive in charge of credit risk sleepless nights.) How many credit card points would a $171 million charge generate? (Enough, by one calculation, for 3,000 first-class airline flights to anywhere.)

One question the media didn't ask was whether this transaction had anything to do with currency manipulation. The answer is yes. It illustrates why currency manipulation is a more complicated question than opponents of free trade would like Americans to think.

By law, a Chinese citizen may only move $50,000 a year out of the country. There are loopholes, however. One is an exemption for paying off credit card debt, even $171 million in credit card debt.

Between loopholes in the law and fear about the economic outlook, China has a capital-flight problem. Chinese are exploiting the loopholes to move their savings to safer havens offshore. As they do they convert yuan into dollars, weakening the Chinese currency. The more it weakens, the more fearful people become. If the government fails to intervene, the yuan spirals down ever more rapidly as capital flight begets still more capital flight.

So the government intervenes. Last year it bought yuan again and again, pouring an incredible $500 billion of its precious reserves into propping up the Chinese currency. After devaluing the yuan last August, the government has made heroic efforts to prevent a further fall, injecting $100 billion or more many months.

Unfortunately for the government, this is a damned-if-you-do, damned-if-you-don't situation. Failing to intervene encourages capital flight; heavy intervention invites traders to bet the country cannot bleed foreign-currency reserves indefinitely and will eventually be forced to devalue again. Either way, pressure on the currency intensifies. It isn't surprising, then, that a sigh of relief rippled through the market when China announced recently that it had reduced its monthly foreign-exchange interventions to a mere $29 billion (…).

Politicians blasting the Trans-Pacific Partnership trade agreement (which, incidentally, does not involve China) say it gives currency manipulation a green light. Listening to these critics you'd think currency manipulators were evil-eyed connivers in Charlie Chan mustaches plotting in back rooms to destroy American manufacturing jobs.

Reality demolishes this stereotype. For one thing, governments aren't the only actors in this play. Foreign-exchange traders, nervous-nelly savers and high-rolling art connoisseurs are on stage, as well.

And not just in bit parts. All three have played an important role in the yuan drama of recent months. In Japan foreign investors have upstaged the nation's central bank. When it introduced negative interest rates in January, it expected the yen to fall. The investors had other ideas. The yen rose (…).

Even when governments take center stage they don't always play the part of export-promoting, import-blocking mercantilists. When the Federal Reserve opened introduced "quantitative easing" a few years ago its intent was to stimulate domestic demand. The weakening of the dollar was an unintended effect.

As these examples illustrate, it's easier to decry currency manipulation than to define it. Currency manipulation has become a loaded term of uncertain meaning, sort of like GMOs. People may not know exactly what it is, but they know they're against it.

Almost any attempt a country makes to boost its economy may weaken its currency. So, for that matter, may government actions taken for any of a number of reasons. You have to wonder: Does letting a billionaire make nine-figure charges on his credit card count as currency manipulation?

Urban Lehner can be reached at



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