Paul Krugman and others have recently claimed that Chinese currency manipulation is “an issue whose time has passed.” There are two fundamental problems with these arguments. First, China’s global trade surplus appears to be perhaps three to four times larger than has previously been reported. Second, productivity in China is growing much faster than in the United States and other developed countries and therefore, China’s exchange rate likely needs to appreciate at least 3 to 5 percent per year just to keep its trade surplus from growing. On the first issue—what the size of the Chinese current account surplus and its recent movement tell us about the need for currency realignment—it’s worth noting that most of the decline in China’s global trade surplus since 2008 is explained by the great recession and the sluggish recovery, especially in Europe. However, the U.S. bilateral deficit with China has increased by a third since it bottomed-out in 2009, which has slowed the U.S. recovery.

Further, China’s trade data likely understates its global trade surplus by a significant amount, a problem that has been ignored by officials in the United States, the International Monetary Fund and other international agencies. The IMF relies on self-reported data from each member country. Analysis of trade data from the United Nations shows that China is massively under-reporting its exports. In 2010, China reported global exports of $1.6 trillion and imports of $1,3 trillion, and a resulting trade surplus of $250 billion. However, the UN also provides data on imports by source for each country. Data were available for 139 countries who reported total imports from China of $2,2 trillion, $600 billion more than what China reports for its own exports. This is far in excess of any reasonable amount that can be accounted for by freight or other normal shipping costs. If we compare this export figure from receiving countries’ reports to China’s reported imports (which roughly match the UN data on reported exports to China, adjusted for shipping costs), they indicate a global Chinese surplus of $900 billion, 250 percent larger than that reported by China in 2010. Perhaps 10 percent of this amount can be explained by shipping costs, but the great bulk appears to reflect differences in the treatment of China’s imports and exports through Hong Kong, and possible transfer price manipulations (Preeg 2012, note 1).

Thus, if China’s trade surplus is much larger than reported by the IMF, this indicates that the one-off revaluation needed may still be in the 30 percent to 40 percent range.

This brings us to the second point: Even after this one-off adjustment, a rolling yuan adjustment will be needed in the future to compensate for differences in productivity growth between China and the U.S.

To put this point simply, we are shooting at a moving target where equilibrium exchange rates for China and other rapidly developing countries are concerned, largely because of differences in productivity growth rates. Between 1995 and 2009, China experienced manufacturing productivity growth that ranged between 6.7 percent and 9.6 percent per year. Over the same period, labor productivity growth in U.S. manufacturing averaged only 3.7 percent per year.” All else equal, this indicates that the yuan must appreciate at least 3 to 5 percent per year just to keep China’s trade surplus from growing, which largely or completely explains the 30 percent real appreciation in the yuan over the past five years. Thus, a substantial, one-off appreciation by China is still needed to rebalance global growth, in addition to trend appreciation, particularly given the apparent, massive underestimation of China’s global trade surplus.

World Trade Organization and IMF rules “forbid currency manipulation to maintain trade surpluses,” as noted by Fred Bergsten and Joe Gagnon. China manages its currency by buying U.S. treasury bills and other government securities. We can put a stop to it now, and it doesn’t have to involve tariffs or a trade war.1 I heartily agree with Gagnon’s proposals to target a greatly expanded list of up to 20 currency manipulators in order to bring about an orderly rebalancing of global trade flows. But China has by far the largest global trade surpluses, and its foreign exchange reserves are at least 250 percent greater than any other country in the world. Stopping China is central to ending currency manipulation.