Thursday, November 19, 2009

Why China Resists Currency Revaluation

From the Economist, "China's Currency: A Yuan-Sided Argument":

PRESIDENT BARACK OBAMA, on his first visit to China this week, urged the government to allow its currency to rise. President Hu Jintao politely chose to ignore him. In recent weeks Jean-Claude Trichet, the president of the European Central Bank, and Dominique Strauss-Kahn, the managing director of the International Monetary Fund, have also called for a stronger yuan. But China will adjust its currency only when it sees fit, not in response to foreign pressure.

China allowed the yuan to rise by 21% against the dollar in the three years to July 2008, but since then it has more or less kept the rate fixed. As a result, the yuan’s trade-weighted value has been dragged down this year by the sickly dollar, while many other currencies have soared. Since March the Brazilian real and the South Korean won have gained 42% and 36% respectively against the yuan, seriously eroding those countries’ competitiveness.

Speculation about a change in China’s currency policy increased in the week before Mr Obama’s visit, after the People’s Bank of China tweaked the usual wording in its quarterly monetary-policy report. It dropped a phrase about keeping the yuan “basically stable” and added that foreign-exchange policy would take into account “international capital flows and changes in major currencies”. But exchange-rate policy is decided by the State Council, not the central bank. And many policymakers, notably in the Ministry of Commerce, do not favour a revaluation right now.

Indeed, Chinese officials have become bolder in standing up to America. “We don’t think that it’s good for the world economic recovery that you ask others to appreciate while you depreciate your own currency…It’s also unfair,” said a spokesman for the Ministry of Commerce on November 16th. The previous day Liu Mingkang, China’s chief banking regulator, blasted America for its low interest rates and for the falling dollar, which, he suggested, might be encouraging a dollar carry trade and, in turn, global asset-price bubbles. He strangely ignored the fact that China’s own overly lax monetary policy, partly the result of its fixed exchange rate, risks fuelling bubbles in its domestic property and equity markets.

Foreigners argue that a stronger yuan would not only help reduce global imbalances, such as America’s trade deficit, but would also benefit China. It would help China regain control of its monetary policy. By pegging to the dollar, it is, in effect, importing America’s monetary policy, which is too loose for China’s fast-growing economy. A stronger yuan would also help rebalance China’s economy, making it less dependent on exports, putting future growth on a more sustainable path.

If a stronger exchange rate is in China’s own interest, why does it resist?
The answer at the link.

But compare to, C. Fred Bergsten, "
The Dollar and the Deficits: How Washington Can Prevent the Next Crisis."

RELATED: Pejman Yousefzadeh, "
Overestimating Chinese Power, and the State of Sino-American Relations."


AmPowerBlog said...

Thanks Philippe. What do you think of the guy?