Economist Paul Krugman comments on the RMB policy shift announced last weekend. As usual, he gets his facts right but ignores the reality of PRC domestic politics.

This is an old story, I guess. Krugman and others, particularly in the U.S., periodically complain about the value of the RMB and the refusal of Beijing to do anything about it. I share in that frustration.

His latest column is a response to the announcement made last weekend, essentially saying that the RMB’s dollar peg, which had been fixed for about two years, would be discontinued, and that a more flexible regime would take its place. Krugman isn’t buying it:

[F]ar from representing a step in the right direction, the Chinese announcement was an exercise in bad faith  —  an attempt to exploit U.S. restraint.

In short, they’re playing games.

China has allowed the renminbi to rise  —  but barely. As of Thursday, the currency was only about half a percent higher than its typical level before the announcement. And all indications are that watching the future movement of the renminbi will be like watching paint dry.

What the Chinese have done, they claim, to increase the “flexibility” of their exchange rate: it’s moving around more from day to day than it did in the past, sometimes up, sometimes down.

Of course, Chinese policy makers know perfectly well that although U.S. officials have indeed called for more currency flexibility, that was just a diplomatic euphemism for what America, and the world, wants (and has the right to demand): a much stronger renminbi. Having the currency bob up or down slightly makes no difference to the fundamentals.

Krugman is right, of course. Nothing much has changed over the past week, and tracking the movement of the RMB over the next few months might indeed feel like watching paint dry. It ain’t gonna happen quickly, and Beijing has already confirmed this.

However, and I reiterate the spirit of what I wrote this Monday, whose fault was it to take last weekend’s announcement about “flexibility” and turn it into a breathless story about a sudden revaluation? Certainly the U.S. media saw it that way, at least for a day or two, and quite a few U.S. lawmakers got sucked into the gravity well of the positive spin as well.

Was Beijing acting in “bad faith?” A more precise question is whether they thought that the West would misconstrue talk about “flexibility” and assume it meant “revaluation.” Probably they did, so I would have to side with Krugman on that.

But let’s not all get our panties in a bunch over that. China is acting on what it sees are its national interests, just as the U.S. and every other country does. I am in no way surprised that China used a bit of sleight of hand to convince folks that it was moving on currency policy when the truth was much different. If they can get away with it, they will do it. No need to get offended; this is realpolitik. If Beijing had outright lied to U.S. officials about something — that would have been a different story.

Just as guilty here are the irresponsible members of the media and government in the U.S. that ran with a highly speculative account of what Beijing was going to do. To the extent that there is now disappointment with what has happened in the past week, I think it is fair to blame some of this on unrealistic expectations.

As usual, though, Krugman fails to to step out of the figurative shoes of a U.S. policy maker. Not surprising — he mostly writes about U.S. domestic and international policy. When the RMB doesn’t move, his natural tendency, therefore, is to evaluate whether trade sanctions are good or bad. For some time now, he has been advocating some form of punitive measures by the U.S.

But what of the China policy maker? One can argue for/against a revaluation based on Chinese economic politics (and the internal fighting is where this all gets sorted out), but one of the other wrinkles that Krugman, and many other critics, routinely fail to mention, is that all of these decisions have a nationalist context. That’s kind of interesting, by the way, since a lot of the criticism in China by U.S. policy makers is made by populists who appeal to nationalism or xenophobia.

No politician in China wants to be seen as caving in to U.S. pressure on the RMB. I’m not saying that this is the only policy consideration, or even the most important one, but it certainly can effect timing of policy implementation.

For example, if and when a decision is made in Beijing to revalue, the government will then look at the proper timing. Just for the sake of argument, do you think they will do so right before the publication of a U.S. Treasury Department report that names international currency manipulators, or would they wait for a while until the issue dies down?

I am not a fantasist. I don’t believe, as some have suggested, that if the U.S. just stops all criticisms of China, Beijing will do the right thing. No, criticism is good, if used strategically. Constant criticism, on the other hand, just helps out the nationalist position in Beijing and provides policy makers with another excuse for policy delays.

Better, not just more, criticism, and realistic expectations might be useful for U.S. policy going forward.