China Attacks U.S. Currency Manipulation; Economists’ Heads Explode

China, where, as a matter of policy, the yuan is deliberately undervalued in order to keep Chinese exports cheap, is now attacking the U.S. for its weak currency. Is there a translation for “the pot calling the kettle black?” In better news, at least the Chinese finally acknowledged that currency manipulation is a form of trade protectionism.

Premier Wen Jiabao aimed sharp words at Washington on Sunday, ceding little ground on China’s currency policy and suggesting that U.S. efforts to boost its exports by weakening the dollar amounted to “a kind of trade protectionism.”

Perhaps now Treasury Secretary Tim Geithner can certify that they are manipulating their currency and Commerce Secretary Gary Locke will impose economy-wide sanctions? Don’t hold your breath. The Treasury Department declined to comment on Wen’s statement, and the State Department referred all questions on the yuan to the Treasury Department.

Even more shockingly, Wen denied that the Chinese currency was undervalued at all.

“First of all, I do not think the renminbi is undervalued,” Mr. Wen said, using the Chinese currency’s official name. “We are opposed to countries pointing fingers at each other or taking strong measures to force other countries to appreciate their currencies. To do this is not beneficial to reform of the renminbi exchange-rate regime.”

Wen’s comments come despite the fact that the yuan is pegged to the dollar but is only allowed to float within a defined band below the dollar, in order to encourage exports. The Wall Street Journal notes that earlier this month, Chinese officials even acknowledged that.

He didn’t repeat the language used this month by central bank Gov. Zhou Xiaochuan, who had said the yuan’s de facto peg to the U.S. dollar is a “special” measure that will eventually end. But Mr. Wen repeated previous statements that reforms to the currency system will continue. While he didn’t rule out the possibility that the yuan could rise against the dollar, he argued that it doesn’t need to.

Need is, of course, a matter of perspectives. U.S. exporters have been arguing for years that the yuan needs to be revalued in order to establish a fair trade system.

Wen, however, continued with his somewhat ironic pronouncements.

“I can understand that some countries want to increase their share of exports,” Mr. Wen said, in an apparent reference to the Obama administration’s goal. “What I don’t understand is the practice of depreciating one’s own currency and attempting to press other countries to appreciate their own currencies solely for the purpose of increasing one’s own exports,” he added. “This kind of practice I think is a kind of trade protectionism.”

In other words, China has an explicit policy by which it keeps the yuan weak in order to increase its exports and has constantly resisted pressure from the U.S. and EU to float its currency, which everyone (including China) believes would reduce its exports. Yet when the dollar is weak due to an economic crisis and low interest rates designed to stave off collapse — as opposed to massive monetary interventions, which would be reflected in higher rates of inflation, which the U.S. doesn’t have — Chinese leaders accuse other countries of engaging in the same trade-distorting monetary practices that China uses in order to pressure them to allow their currency to appreciate.