Author: Ronald McKinnon, Stanford University
In reforming the international monetary system, exchange rates usually get primary attention front and center — such as in numerous meetings of the Group of 20. Indeed, at the G20 meeting in November 2010, President Obama attacked China for not appreciating its currency.
But China’s monetary policy has been oriented toward keeping the renminbi-dollar rate stable since 1994, which served China well as a nominal anchor for its domestic price level and to smooth exchange relationships with its smaller neighbours. Read more…
Author: Ronald I McKinnon, Stanford University
Going in
Behind much of the political clamour is the academic view that exchange rate ’flexibility’ is itself desirable — particularly as a way of correcting imbalances in foreign trade. Bowing to this foreign pressure, the People’s Bank of China (PBOC) announced in June it was unhooking its two-year old peg toward flexibility. Read more…
Author: Ronald I. McKinnon, Stanford University
Nobody disputes that almost three decades of US trade (net saving) deficits have made the global system of finance and trade more accident-prone. Outstanding dollar debts have become huge, and threaten America’s own financial future. Insofar as the principal creditor countries in Asia (Japan in the 1980s and 1990s, China since 2000) are industrial countries relying heavily on exports of manufactures, the transfer of their surplus savings to the saving-deficient US requires that they collectively run large trade surpluses in manufactures. The resulting large American trade deficits have worsened the ‘natural’ decline in the relative size of the American manufacturing sector, and eroded the US industrial base.
One unfortunate consequence of this industrial decline has been an outbreak of protectionism in the United States, which is exacerbated by the conviction that foreigners have somehow been cheating with their exchange rate and other commercial policies. Read more…
Author: Ronald I. McKinnon, Stanford University
A compromise solution involving the appreciation of the yuan is possible. But the following basic points must be observed.
It is not possible for China to remove capital controls and expect a large outflow of private capital to offset its trade surplus (making a further buildup of official exchange reserves unnecessary) unless the yuan-dollar rate is expected to remain stable into the indefinite future. Otherwise, private Chinese investors would be loath to acquire dollar assets, as there would be a good chance that they would depreciate in terms of renminbi (yuan). Read more…
Author: Ronald I. McKinnon, Stanford University
In the debate on whether China should appreciate its currency or keep it stable as I argue, it’s worth going back to some basics to clear things up.
For a ‘home’ country, consider the identity from the national income accounts:
X – M = S – I = Trade (Saving) Surplus
where X is exports and M is imports (both broadly defined), and S is gross national saving and I is gross domestic investment. Read more…
Author: Ronald I. McKinnon, Stanford University
Speculation is rife about when, not just if, China should exit from its policy of stabilising the yuan/dollar rate. Investment banks and hedge funds are making their usual one-way bets. Chinese officials are being closely quizzed for possible hints as to when the great event is going to happen. Governor Zhou Xiaochuan of the People’s Bank of China (PBC) is playing the role of Hamlet. Recently he told a press conference that the currency peg was a ‘special measure’ to help China weather the financial crisis. ‘These policies sooner or later will be withdrawn’. In seeming contrast, Premier Wen Jiabao declaimed on March 5, ‘We will continue to improve the mechanism for setting the renminbi and keep it basically stable at an appropriate and balanced level’.
But must China ever appreciate? Read more…
