Chinese Currency Manipulation

I’m amazed at the persistence, with which American policymakers keep blaming China for its economic vows. Meanwhile, we finally received a response to US’s continuing whining about undervalued Renminbi from the China’s Foreign Ministry: “We believe the appreciation of the renminbi cannot bring about balanced trade and cannot help the U.S. solve its own problems of unemployment, overconsumption and a low savings rate”.

I’m inclined to agree with all three factors outlined in this statement, perhaps to a slightly lesser degree with cheap RMB’s impact on US unemployment. There might be indeed some revival if it were not for the Chinese currency. But US exports are not cheap anyway, given Euro’s record lows and weakening purchasing power in Europe. Plus, there is a host of new industrial powerhouses competing with China, such as Vietnam, Indonesia, India etc. flooding the US with shoddy clothes and other low value added goods.

The impact of overconsumption and low savings rate is indisputable. Those were the root causes of the financial crisis and continue to sink the country deeper into debt. Joe the Plumber himself back in good old days would get several cars and a house he could never afford even with his GM salary.

But there is another point the Chinese foreign ministry spokesman did not highlight. The US is a postindustrial nation. As simple as that. It will not be and should not try to revive its blue collar work force. The US’s competitive advantages are high-value added good, financial services, R&D etc. US manufacturing corporations that have put their major stake in developing markets abroad will be get a hedge. Thus, any attempt to appeal to Joe is a pure populism.

China, in fact, is on track to appreciating its currency. It needs to mitigate its excessive trade surplus and resulting overdependence on exports. It just had to boost exports in the wake of the crisis, since it was the only way to stay afloat.

This entry was posted in China currency manipulation, chinese economic policy, chinese economy, US-China economic relationship and tagged , , . Bookmark the permalink.

3 Responses to Chinese Currency Manipulation

  1. Ken says:

    Very good points Misha. I agree with nearly all of them.

    The combination of a low savings rate and overconsumption is indeed a deadly one. Simply put, most Americans have for too long lived beyond their means. This is not just an economics issue; there are harmful cultural norms that contribute to this. While I think US policymakers and leaders should pressure China to appreciate its currency, they also need to lead in getting the country to take a hard look at themselves. (not likely though)

    One factor that was not mentioned is the role of weak Chinese institutions–banks, the healthcare system, the pension system. These institutions are weak (or non-existent) and cannot be relied on. As a result, the average Chinese (“Ping the laborer”) person is going to hoard his money in case a rainy day occurs. Until China strengthens these institutions, domestic spending will not budge.

    Yes, America’s comparative advantage is in producing high-value tech products. Our system is also more conducive to innovation and R&D. We have a great degree of “soft power” to lure skilled and talented people from overseas.
    However, I think this advantage is potentially tenuous. If China and India’s students continue to out-achieve American students, this will produce a whole generation of whip-smart techies and businessmen. If we think we’re already competing today with India and China, then just watch what it’s going to be like in a few decades.

  2. Thank you for your comment, Ken. Good point on China’s domestic spending. I think the Chinese government is finally genuinely concerned about boosting domestic consumption and relying less on exports. Domestic consumption is growing against all odds and will continue to grow so the currency will gradually appreciate.

    It’s just that the Chinese people don’t like drastic changes so it’s useless to persuade them to let RMB hike overnight. The US, in its turn has to keep up investment in R&D to stay one step ahead.

  3. DP says:

    It’ll be interesting to see if this blog continues after its author’s recent misfortunes.

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