A blog on Chinese economy & society

China will not revaluate the RMB

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I think China will not revaluate the RMB to placate the West, currency manipulator or not.

Why should it? Europe and Japan may have some merits in criticizing its currency policy as the Yuan has effectively depreciated against the Euro and the Yen.  However, the RMB/USD peg has been in place since 1994, surviving the trough of the Asian Financial Crisis when the RMB was widely considered OVERVALUED. The recent US call for RMB appreciation is like someone selling lemonade being out-competed and, instead of offering better product or better prices in his own shop, insisting that his competitor should raise prices to make life easier for him. There is nothing in this world or next stopping  US exporters from cutting their prices in dollar terms and gaining global market share but, oh, that will imply dredged deflation and really too painful for the chosen people.

But then, global trade needs to be balanced to stave off protectionism. And a bankrupt customer is not a very good one either. Andy Xie, my favorite China economist, has long advocated that China boosts domestic consumption by increasing wages and tighten environmental regulations. This way while the competitiveness of Chinese exporters will be shaved, helping to balance trade, the benefits actually accrue to the Chinese people.

Hu Jintao, the President of China, has recently made an important speech at the Party School of the Central Committee of CPC (yes, there’s such a thing, and hugely influential as well), signaling China’s push to develop its domestic economy and reduce reliance on exports. At the top of the agenda is to increase income distribution of household sector. Sure enough, Jiangsu, the 3rd largest export province, readily announced that they’re raising the minimum wage by a whopping 13%. Other manufacturing hubs like Dongguan, which is actually experiencing labor shortage at the moment, are likely to follow suit.

Higher wages and potential new taxes on polluters, precisely what Xie had argued for instead of RMB appreciation which will only benefit China’s competitors.


Written by Cindy Luk

February 11, 2010 at 12:19 am

Posted in China, Macro

Tagged with , , , , ,

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