Author: Peter Drysdale
The value of China’s currency, the renminbi (RMB), or yuan, has become the lightning rod for fixing everything in China’s economic relations with the rest of the world, especially the United States. Were it so simple.
This week’s lead essay from Ron McKinnon at Stanford carefully explains the predicament that China is in with its currency and why floating might well create more problems for China and the rest of the world than we all would have if a steadier and controlled appreciation of the RMB took place, accompanied by other perhaps even more important measures to deal with the imbalances that an under-valued RMB is supposed to cause. 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: Yiping Huang, Peking University and ANU
After September 9, the renminbi suddenly accelerated its pace of appreciation against the US dollar. By September 15, it had appreciated more than 1 per cent. This represented a major departure from fluctuation within a narrow band after June 19, when the People’s Bank of China (PBOC) announced an increase in exchange rate flexibility. This change should be commended since it should help to manage external pressures, at least on the margin. Yet the timing of the change is suspiciously close to the scheduled hearing at the US Congress and other related events, and that will probably strengthen the impression that China moved on the currency because of the external pressure. This will not help China’s future dealings with international partners on renminbi exchange rate policy issues.
When President Hu Jintao visited the US in April this year, he made two important points on exchange rate policy reform: China would push forward the reform steadily regardless; and China would not change its policies under foreign pressure. Initially this caused some confusion in the international market. But the message, I thought, was subtle and clear: China is determined to reform, but noises in foreign countries are not helpful. Read more…
Author: Geng Xiao, Columbia University
China’s key macroeconomic challenge over the next two decades of reform and development is to determine how to manage its exchange, interest and inflation rates so as to facilitate sustainable, stable and efficient economic growth while the Western economies shrink in size relative to emerging market economies.
To appreciate magnitude of this challenge, one must realise that China’s high growth in the past 30 years has largely been a story of rapid productivity growth and catching up. Read more…
Author: Yiping Huang, Peking University
International anxiety over China’s currency exchange rate policy appears to be gathering momentum again, given that the yuan has risen only slightly since June 19 when the People’s Bank of China (PBOC) made it more flexible.
For my part, I think that although the recent global economic uncertainty warrants some caution, it is vital that the yuan rises more steadily over time in order to address economic imbalances and international reactions. Read more…
Author: Evan A. Feigenbaum, CFR
I have a Ph.D. in Chinese politics—which means I have an abiding faith in the idea that, yes, China actually does have politics. That’s always been true, even in the authoritarian depths of the Mao Zedong era. And it’s been true in nearly every aspect of Chinese life, including atop the commanding heights of the economy.
Ten years ago, I wrote a book about how contending networks of generals and technicians fought pitched battles in China’s defense industry at the height of the Mao era. They fought over everything from budgets to weapons designs to procurement priorities to whether China should invest in basic or applied research. 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: Peter Drysdale
Chinese President Hu Jintao is heading to Washington this week to take part in US President Obama’s conference on nuclear disarmament. President Hu’s participation in the meeting, 12-13 April, Washington time, is of interest well beyond what weight it might add to lessening the risks from the world’s nuclear arsenals.
Two days after the nuclear disarmament meeting, on 15 April, the US Treasury was scheduled to make its recommendation on whether China should be cited for manipulating its currency, the RMB (or yuan), ostensibly with the effect of underpricing exports, wracking trade and current account surpluses and causing unemployment and trade deficits in partners like the United States. Read more…
Author: Yiping Huang, Peking University and ANU
Tim Geithner’s decision to delay the US Treasury Department’s biannual report on international economic and exchange rate policy, originally scheduled for release on April 15, probably helped avert a potentially ugly confrontation between the world’s two economic superpowers. The ball is now in China’s court.
Recent developments suggest that China is about to amend its current soft peg of renminbi (RMB) to the US dollar (USD). I remain confident that the band of RMB/USD exchange rate will be widened modestly soon and the RMB could rise by 5-8 per cent before year’s end. Read more…
Author: Wang Yong, Peking University
By 15 April, the US Department of Treasury was scheduled to decide whether to label China as ‘a currency manipulator’. The prospect of a trade war, or even worse a currency war, between the world’s two largest economies has further destabilised the shaky recovery growth of the global economy. Given the extremely complicated nature of the RMB exchange rate in the global economic context, the US should undertake a rational cost-benefit analysis instead of threatening sanction.
Since July 2005, China’s RMB has appreciated by 21 per cent. But this has not significantly improved the US trade deficit, nor reduced China’s trade surplus. 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…
Author: Peter Drysdale
Over the horizon, a storm in US-China relations is gathering around the question of whether China is deliberately undervaluing its currency, the renminbi, against the US dollar, giving it an unfair competitive edge in US markets and causing high levels of American unemployment and current account surpluses. Most economists would accept that there was some measure of undervaluation of the Chinese currency (how much is a more difficult question on which to get agreement). But few would argue that appreciation of the Chinese currency would solve the American woes of which it is supposed to be the cause.
In the feature essay today on this question, Yiping Huang argues that appreciation of the renminbi is certainly on the Chinese economic policy agenda, but he warns, for a number of reasons, that sharp and sudden Chinese appreciation is likely to do more harm to America and the global economy than it would do good, and that it certainly would not alone solve the problems in America that it is supposed to be causing. Read more…
Author: Yiping Huang, Peking University and ANU
Paul Krugman is one of the international economists I most respect. He is a towering figure in the study of international trade. But his understanding of some international economic policy issues is, to put it generously, naïve. In fact, were the Obama administration to follow his policy advice, the world economy could encounter more serious difficulties, if not another recession, in the years ahead.
In the year 2010, Krugman suddenly found a new and passionate interest in China’s exchange rate policy. Read more…
