As Asian economies including China and India expand, commodity and oil prices are moving up and fast. We have heard reports that iron ore prices have doubled for major Australian miners, that means possibly a new record, given that the last year’s fall in price was about a third from its record high. Oil prices have been above $US80 and are trending up.

The sluggish demand from most industrialised countries mean falling or steady prices for their imports of labour intensive and manufactured goods that are the main exports from China.

This means a sharp deterioration in China’s terms of trade is appearing, which will have serious effects on Chinese businesses and its economy including increasingly large current account deficits over the coming months and possibly years to come.

That indicates that it will be economic suicide to appreciate the Chinese currency now.

This is largely due to the following:
1. China’s housing market is worryingly highly priced. Together with inflation pressure, it is warranted to require higher interest rate to have a serious effect on housing demand and speculations.
2. The current account is showing a quite different picture and we have already seen a deficit in recent report. The question is: is that deficit an abnormality or a trend formation? Obviously, current account situation is a key factor in terms of exchange rate movement by policy makers, including external pressures. If current deficits continues or even gets big, what is the point to revalue the RMB?
3. Thirdly, there is no resolution to China’s official $US assets yet. It would be highly imprudent to revalue the RMB without a convincing resolution to those assets, both from public policy point of view or from social stability point of view.
4. The question of what exchange regime is good for China, or for different economic circumstances, especially when taking into account policy instruments available to authorities. It is doubtful that a flexible exchange rate regime will be good for China, and for the rest of the world as far as China’s currency is concerned. Excessive fluctuations in exchange rate are most likely to completely outweigh the benefits of monetary autonomy. Just imagine that a 50% or more move in the exchange rate, often seen in the real world exchange rate movement. What does that means to businesses? That is a 50% price hike, up or down. Is that a good thing?
5. Even from the most recent international experience, most leading industrialised economies have been under flexible exchange rates. Did that help them avoid or dampen the GFC?

So it is time to revisit the issue of exchange rate regimes.