Renminbi revaluation appears imminent

The renminbi is about to appreciate

All signs are pointing to a decision by Beijing to allow its currency to rise in value vs. the US dollar.  In fact, the Financial Times reports today that a high-level Chinese government economist confirmed at a press conference that the trading band for the renminbi will be widened and subsequently the currency will be allowed to appreciate (an earlier FT article addresses the differing positions of Chinese government ministries on the issue).

It will be interesting to see the result.  The Chinese announcement yesterday suggests the resumption of a crawling peg that will have the renminbi appreciate against the US dollar by around 5% a year.  The biggest unknown is how long the appreciating trend will continue.

The fact that the administration said last week that it was delaying a report that might have labelled China as a currency “manipulator” was a clear suggestion that a change in currency policy in China might be in the works.  One might read the increased anti-China rhetoric in Congress as a second indicator–legislators playing to a home audience with draconian legislative proposals that would never be put to a vote.  That would be reminiscent of Congressional behavior years ago when the issue of renewing China’s most favored nation trading status would come up for its yearly review.

Why revalue?

Even before the financial crisis, China was beginning to realize it was coming to the end of the period when it could achieve strong economic growth through exporting to the US while pegging its currency to the dollar.  The question has not been whether to reorient the country toward developing domestic demand, as well as cultivating higher value-added manufacturing.  Rather, it has been how to do this while minimizing economic disruption and potentially destabilizing social effects.  Beijing has also clearly signaled that about the last thing it thinks it needs is a larger hoard of US Treasury bonds, which it assumes Washington will try to evade repaying in full.

Congressional saber-rattling always helped with Japan…

A generation of politicians in Tokyo, now mostly retired, were remarkably receptive to economic demands/threats emanating from Washington.  I think there were two reasons for this.  Japan welcomed “foreign arm-twisting,” which allowed it to shift the responsibility for difficult decisions away from itself.  Blame would accrue to the other government “forcing” Japan to act in a certain way.   Also, government officials who felt social responsibility for losing WWII also felt an obligation to defer to the wishes of the victors.

…but not with China

The social myth is different.  For China, relations with the West are more frequently seen through the lens of the Boxer Rebellion or the Opium Wars, where foreigners invaded China and seized territory.  In the case of the Opium Wars, Britain compelled China to reopen its borders to the British addictive drugs that China was trying to keep away from its citizens.  Not a pretty picture.  Political grandstanding of the Senator Schumer type (a man not noted for his deep knowledge of economic issues) simply does harm.  It reawakens these nineteenth-century memories and causes China to oppose even the most reasonable proposals because they are linked with threats.

Twenty years ago, as China was taking its turn toward capitalism, it needed the West, and the US in particular, as a market for its exports.  It doesn’t think it needs the US now.  Even if it did, it worries that our IOUs may not be any good.  This implies that China doesn’t see the necessity of going to extremes to placate the US any more.

Two other items to note

By all accounts, and in contrast to past behavior, there has only been a muted defense of China by its big customers in the US.  This may well be a result of other changes in China–witness the Google affair–that have tended to block the expansion of US firms into China’s domestic market.

Also, China has explicitly linked its currency policy to the US political stance on Taiwan and Tibet.

It seems to me that China feels the US is dealing from a position of weakness and that, as such, it need not be as indirect in expression its opinions as it has in the past.

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