CCTV-9: Renminbi Appreciation
I was back on CCTV-9’s “Dialogue” Tuesday night, talking this time about the hot topic of the moment: rising US threats to punish China if it does not take action to strengthen its currency, the Renminbi, against the dollar. A new bill has been introduced in the US Senate to do just that, and the Treasury Department has until April 15 to decide whether to label China a “currency manipulator” — a designation that could result in heavy tariffs being imposed across the board on Chinese goods entering the US. You can view the entire show here, or by clicking on the image below.
As you can probably tell from my comments, I’m somewhat torn on this issue. On the one hand, I think the US is putting way too much emphasis on the exchange rate as a “silver bullet” to solve its trade imbalance with China. I fear that without more substantive reforms, we’ll see a repeat of efforts to strengthen the Japanese yen in the 1980s — a policy that proved a lose-lose proposition for both sides. I’ve made this argument many times before, and those who want the full (or at least fuller) version can read it here.
On the other hand, there’s a tendency in China to cling to the Japan example as proof that the Renminbi is fine, and China doesn’t need to do anything. In fact, Japan’s troubles — its stock and real estate bubbles, followed by a “lost decade” of minimal growth — were due only in part to the appreciation of the Yen. More importantly, these were the result of how Japan chose to cope with a stronger Yen by refusing to make necessary adjustments in its economy. In fact, my point is that while China needs to move towards a more flexible exchange rate, it needs to a lot more than that. If it does — and the US helps — a sensible currency adjustment could be part of a comprehensive strategy that sets both countries on a new, more sustainable growth path.
Even though, from China’s point of view, US pressure is unwelcome, and even though it may in many ways be misguided, it may have benefits. In one recent conversation, a Chinese economist remarked to me that the US is arrogant to think that it knows China’s interests better than China does. But China’s interests are not that simple. China has a long-term interest in switching from an export-driven growth model to one driven by domestic demand, and a more flexible exchange rate (and a stronger Renminbi) is part of that. But it has a short-term interest in shielding its exporters (and their employees) from the consequences of a stronger currency. For any country, that would pose a challenge (US politics is repleat with such conflicts). To the extent that US threats provide a counter to China’s short-term interest in standing pat, and shift the political balance towards China embracing its longer-term interests, it’s not necessarily a bad thing.
The problem is, it needs part of a broader strategy that leads to a win-win, and not the kind of lose-lose outcome that happened when the US and Japan focused exclusively on currency and ignored the nature of the markets in which those currencies operated.