Why renminbi appreciation is in China’s interests

Barry Eichengreen makes the case here, without having to warn about Western protectionism.

8 replies on “Why renminbi appreciation is in China’s interests”

Seems a sound argument. I find this a lot more convincing than Paul Krugman’s recent blogging on this topic (here and here).

Would another good reason (from a Chinese perspective) for the Chinese to change their policy be the possibility that their current policy will force dollar-printing, which would destroy their reserves?

If the Chinese are still determined to manipulate their currency, then what to do? I think US protectionism / trade war would be the only way to make them see sense, the US is still much more powerful in this regard surely. Martin Wolf has mentioned this problem too.

The Chinese have already taken measures this week on the monetary side and while they may end the unofficial peg against the US dollar, which has been in force some 2008, on past form, a small appreciation will be tolerated.

Don’t be surprised if by 2011, a slow recovery in the US and losses in the mid-term elections, will force Obama to play the Nixon card and impose a special tariff on Chinese imports.

In 1971, Nixon had forced a realignment of currencies through the ending of the fixed rates regime by imposing a unilateral special tariff.

Can’t disagree. I have written about this myself.

But one symptom and important socio political factor that isn’t mentioned int he article is the ballooning capital account that comes necessarily with the ballooning current account.

There are undoubtedly many influential decision makers in China that are enjoying spending the foreign currency that is washing into the country like a tsunami. There is much political and nationalistic utility to be dervied from spending this by buying up a large assortment of foreign assets.

A quick Google will show the current extent of the Chinese spending spree. Such globetrotting fun will be hard to give up for the ruling elite.

Given that the Han dominate all others in China, stabilty is a must. Google’s move to leave and to escape that control, taking their chances with the chinese market being blocked off to them, is a good reason why they were right to be so respectful of the wishes of the Han to have stability. They have some leverage. So has the US.

But the US has bleated again and again about import controls. They will not impose a general control because much of what had been US manufacturing is now located in China. It is designed to flow into the USA. Can we imagine the hullabuloo if the depreciated the Yuan vs the $? What industries are left in the USA that can benefit from protection? As the US economy contracts, despite all the msm talk about green shoots and recovery, what industry will be left? Aerospace, arms, farming Ford and forestry.

What the US can afford to buy from China is declining and so are the trade flows. China has not devalued the Yuan and may not do so. It will continue to do what is successful, as a kind of hypnotic trance paralyzes policy formation in all countries in a boom. No one wants to be a party pooper!

The US will continue to amass campaign funds by shouting out about tartiffs. China will continue payoffs to ensure business as usual. If the USA tries to scapegoat the Han, I look forward to some chinese chess, also known as Go. Surprizes for the USA, and not of the pleasant kind, but not in any way tracable to the Han. The USA is now in Pakistan, an ally of China of long standing. This is felt as a threat by China. Buttressing Terror helps the USA, revealing it to be a charade will hurt no one, will it?

Am I right in thinking that US/UK/Dutch banks have not made much inroad into China?

The Chinese are full of capital in the sense that they are discovering all the inefficiency of peasant economy and dismantling it wholesale and across the second largest population in the world? The labour freed up enables resources to be internally harvested and the only capital brought in is in the form of design etc for the new mainly manufacturing industries.

How long can this go on? Well it seems that it is like a weighted treadmill: it must go on or else the whole thing will collapse. There are many millions of peasants still on the land. All the new capital created is not actually monetized in full, particularly it is also hidden in their large savings ratio, locking away much value. Perhaps therefore, the government can succesfully spend ie invent monetary capital to make up the difference?

The only problem would be for the money to be misdirected as they lack mature independent markets which used to perform that function in the west? They can substitute internal consumption for exports, but it will require a new model, which is necessary given the lack of these markets. Any collapse in western demand, which is unlikely as they can and will out compete, will trigger the development of these markets? The encouragement of gold ptm etc purchases, is effectively to quell internal speculations on land and stock exchanges, but not to kill them. They are becoming much wealthier and losing none of it to the banking system. The exports are merely invested in foreign paper and now commodity investments. The whole set up lacks the connections engineered by a banking system. Their central control acts as such a system, bypassing the banking system?

Now were I Indian, I might be very interested in studying that whole process.

Thus they can set virtually any value they wish on the RMB? It just requires more activity on their part and soacial but mainly structural adjustment enabling them to exercise more control.

Ultimately they will revalue and quite a bit up, as they do not face Japan style problems of a bubble and declining population and overstrong currency. As they will have few competitors at that stage, it will take some time to overcome the barriers to entry in the west, particularly if we have destroyed most of our remaining capital in another sovereign bubble?

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