More on the Need for a Revaluation of the Chinese Currency

A Japanese  economist/friend of mine just returned from China.  He broached the subject of a currency revaluation to academics and government officials and received no acknowledgement of any problem with the current peg to the dollar. He recommended that I read Martin Wolf’s 12/8  column in the Financial Times.

Below  are a few excerpts from Mr. Wolf’s article, but we recommend a reading of the entire article .

Commenting on the recent speech by the Chinese premier, Mr. Wolf writes:

“Naturally, the Chinese resent the pressure. At the conclusion of a European Union-China summit in Nanjing last week, Wen Jiabao, the Chinese premier, complained about demands for Beijing to allow its  currency to appreciate.   He  protested that “some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” The premier also repeated the traditional mantra: “We will maintain the stability of the renminbi at a reasonable and balanced level.”

“We can make four obvious replies to Mr Wen. First, whatever the Chinese may feel, the degree of protectionism directed at their exports has been astonishingly small, given the depth of the recession. Second, the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world. Its real exchange rate is, for example, no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest growing economy and largest current account surplus.”

…………“China’s exchange rate regime and structural policies are, indeed, of concern to the world. So, too, are the policies of other significant powers. What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer: a wave of fiscal crises. “

“Neither answer is acceptable; we need co-operative adjustment. Without it, protectionism in deficit countries is inevitable. We are watching a slow-motion train wreck. We must stop it.”

I agree.  China’s trading partners need to become much more aggressive in pushing the Chinese on this.

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One Response to More on the Need for a Revaluation of the Chinese Currency

  1. FREE TRADE
    I have been a free trader for most of my career, and I still believe free trade works in the long run. By the long run I mean a generation. In the short run there are clearly big winners and losers. This administration and this country has been oblivious to the para dime shift that has been occurring.

    Trade is a heated issue. With all kinds of pro and con arguments. Trade costs jobs. Trade creates jobs. Trade allows us to buy cheap manufactured goods, trade opens up markets for us. We’ve all heard them to the point where people can’t distinguish between the forest and the trees.

    To me the test of whether trade is good or bad is simple. Follow the money. When you play monopoly, at the end of the game the winner is the one with all the money, hotels and houses. In terms of trade China has all our money, almost a trillion in reserves, and they are be able to buy our hotels , houses , companies and resources. This is not rocket science. We borrow and spend, and they save and invest and sell. This is a transfer of wealth at a speed and magnitude never before witnessed. We have tun trade and current deficits on a scale never before seen by any country in the history of the planet. When you have two billion people increasing their living standards as rapidly as has been occurring over the last two decades only a fool can think its not coming at some one’s expense. Together with the transfer of wealth that is occurring to the oil producers and the cost of the war it’s no wonder we are going broke.

    What should have been done and still needs to be done, in my opinion is to have trade policies that slow this thing down. So that this monumental shift can take place over a greater length of time. We need to buy time to adjust to compete with these low wage behemoths without health care or environmental constraints. We need to keep jobs and dollars circulating in this country rather than sending them abroad. We should provide ourselves some time to fix our health care system retrain our workforce change our economic policies away from consumption to savings and investment, instead of allowing ourselves to be pillaged.
    Posted by Robert Goetter at 3:38 PM 1 comments

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