Two Democratic senators are targeting the People's Republic of China purportedly in retaliation for a trade war begun by China's “currency manipulation.” Chuck Schumer of New York and Max Baucus of Montana are pushing the administration to fight China, supposedly in the name of saving U.S. manufacturing.
But money trails and whispers from K Street suggest this currency spat may have less to do with American factories and more to do with politically connected hedge funds engaged in currency speculation.
Schumer and Baucus have repeatedly urged the Commerce Department to file suit with the World Trade Organization against China for currency manipulation. China's central bank for years has worked hard to make sure that its currency, the yuan renminbi, keeps a constant exchange rate with the U.S. dollar. Before mid-2005, the yuan was steady at about 12 cents, and since mid-2008 it has stayed a bit below 15 cents. Schumer and Baucus argue that if China let its currency “float” versus the dollar — if it let market forces set the exchange rate — the yuan would rise 25 to 40 percent, perhaps above 20 cents to the yuan.
Keeping the yuan low subsidizes Chinese manufacturers, because a more expensive yuan (measured by dollars) would effectively make Chinese goods more expensive for Americans. That's why Baucus says, “The bottom line is that China continues to manipulate its currency at the expense of American workers and manufacturers.”
This concern for American manufacturers is standard politics, but it's a bit out of character for Schumer and Baucus. Schumer is the senator from Wall Street, and Baucus, chairman of the Senate Finance Committee, also concerns himself more frequently with Goldman Sachs than with Bethlehem Steel.
Both men raise more money from the “securities and investment” industry than from any other, according to the Center for Responsive Politics — and Schumer is the industry's top recipient. Schumer is also, by far, the top recipient of hedge fund money, having raised as much in the past two years as the top three Republicans combined.
Schumer's hedge fund ties are deep. When Democrats took over Congress in 2007, Schumer called the biggest hedge-fund managers to a New York dinner and told them, according to the New York Times, “If you want Washington to work with you, you had better work better with one another.” Hedge funds launched political action committees, and the industry multiplied its political giving by four. Hedge fund lobbying spending exploded, too, and they hired away his top banking staffer as their lobbyist (she now raises funds for Schumer).
Currency exchange rates are a major playground for hedge funds. George Soros, for instance, has multiplied his hedge funds' value a hundred-fold through currency speculation. One K Street lobbyist told me he's received phone calls this week from a hedge-fund client desperate to learn if and when Schumer and Baucus's fight to un-peg the yuan might go through Congress.
So the question is this: Which hedge funds are betting on the yuan rising versus the dollar (or possibly even falling)? And is anyone at that fund keeping in touch with Schumer?
This doesn't have to be a conspiracy or a quid pro quo to be something unseemly. Even if you take Schumer and Baucus at their word — that they are just trying to end a Chinese manufacturing subsidy — you still have to wonder which hedge funds are trying to make billions of dollars off of a yuan movement, and how their closeness with Schumer might be an aid.
It's reportedly happened before — for instance in Mexico in 1994, when the IMF pressured Mexico to devalue the peso. According to Jude Wanniski, “There was a big party at Morgan Stanley after the Mexican peso devaluation, people from all over Wall Street came, they drank champagne and smoked cigars and congratulated themselves on how they pulled it off and they made a fortune.”
We know that hedge funds are trying to read Congress to see if the yuan might move, but we don't know who might already have his chips on the table. Hedge funds are often secretive about their investments, and so it's something of a guessing game.
But this we do know: when Chuck Schumer in 2007 summoned the hedge funds to D.C., he introduced a whole new dimension to the Washington influence game. Lobbying isn't just about companies trying to aid or protect their business, it's also huge investors trying to make their big bets pay off. When you can hide behind the American factory and working man, so much the better.
Timothy P.Carney, The Examiner's senior political columnist, can be contacted at email@example.com. His column appears Monday and Thursday, and his stories and blog posts appear on ExaminerPolitics.com.