Need I even say it? Despite fantastic economic figures just out from China (exports up 46% in February year-on-year, 8.7% economic growth in 2009), the world-wide financial/economic crisis is far from over. An ever-expanding list of governments (Greece, Spain, Ireland, the UK – yes, also including the US) have adopted the strategy of grabbing back desperately-needed economic growth through success in increasing exports. A corollary to that is that a weak currency is an awfully handy thing.
Except that it simply isn’t possible, from a mathematic point-of-view, for everyone to weaken their currencies at the same time. Someone’s money – preferably some country with a huge presence in international trade – has to go up in value, relatively. And this gets back to recent Chinese economic performance: China seems to be doing rather well, but it is also suffering from a notable bout of price-inflation. Furthermore, the Middle Kingdom’s currency, the Renminbi, is clearly undervalued – infamously so, even, due to the Chinese government’s explicit policy to protect it with various currency restrictions to be sure to keep it that way. So wouldn’t we find some nice economic solution for everyone by heeding the calls that have been issuing from US officials for some time now and convincing the Chinese government to cut that stuff out and allow the Renminbi to appreciate in value?
Not according to Tobias Bayer, in his opinion piece for the Financial Times Deutschland (Exchange rate policy: Dangerous game with the Renminbi). As his main piece of evidence, Bayer points out how similar the current situation seems to be to back in the early 1990s, when Japan occupied the position that China has today: trade surpluses that got everyone sore, an under-valued currency, internal inflation. So, in his telling, the US managed to get Japan to embrace the policy prescription of letting the yen appreciate – to disastrous effect. Not only did the big Japanese trade surpluses not abate – actually, they only got larger in succeding years – but the downward pressure on prices that the stronger yen produced actually resulted in a damaging deflationary spiral for that country’s already-weak domestic economy.
By this logic, then, current pressures on China to allow a similar development for the Renminbi are misguided, Bayer claims. For one thing, the Renminbi today is far from a direct analog to the yen of the early 1990s: again, it is a heavily-controlled currency which therefore is hardly used as a unit-of-account (Abrechnungswährung) or reserve currency anywhere outside of China itself, so we’ve got to be careful about any attempts to change it, they may blow up in our face. Furthermore, any releasing of the value of the Renminbi upwards could set off a speculative wave based on the assumption that its value will go further upwards still, thus flooding the country with “hot money” and increasing its economic instability and inflation problem.
No, better to take a more cautious and cooperative approach to this currency problem, in particular one involving China’s biggest trading-partner, the US. First of all, Bayer claims, “[p]rotectionism helps no one” (officials at America’s AFL-CIO, among others, may disagree), so it’s time to cut back on that, from both the American and Chinese sides. Further, the reason there’s so little import demand from the Chinese is that they leave little from their paychecks for purchasing things, since they have to rely on themselves to cover for old age and misfortunes like medical emergencies. China needs to further develop its systems of national social welfare to change that situation, and so coax out greater consumer demand, for goods and services both foreign and domestic. Finally, US experts need to come over to make Chinese financial markets more sophisticated; it’s the absence of certain markets important elsewhere (e.g. for bonds) and the inability of Chinese businessmen to hedge certain financial risks that makes their reliance on a continued undervalued currency so brittle.
Much of this sounds to my ear – especially the prescription of bringing more social insurance to China – as economic policy prescriptions from out of a classical Western European perspective, which I suppose does not invalidate it per se. Then again, I also have to think that a lowering of prices brought about by an upward revaluation of the Renminbi would hardly be as damaging to China as it allegedly was to Japan in the early 90s – the Chinese economy is surely much more robust presently than the Japanese economy was then.
UPDATE: For his part, Paul Krugman is of quite the opposite opinion to Bayer.