Chinese currency: China’s too cheap currency helped create the global imbalances that vex world leaders. As the financial crisis fades, the calls for a revaluation of the renminbi get louder, most recently from Dominique Strauss-Kahn, the head of the International Monetary Fund. He’s partly right. A more stable world does indeed require a higher renminbi – just not quite yet.
Renminbi-bashers say a more expensive currency would shrink the scariest features of the global imbalance: China’s $200 billion trade surplus and its $2 trillion of trade-earned foreign currency. Exports would become more expensive, so customers like the US would consume less. Imports would become cheaper, so China would consume more. Hey presto: no more imbalances.
Economists argue over how much more expensive the currency needs to be. The Peterson Institute thinks the renminbi is 40 per cent cheaper than it fundamentally should be. But holding down the value of the renminbi has enabled China to keep its exports competitive, and its workers busy. Jobs are top priority for a big country with revolution in its recent past.
Also, in today’s globalised and complicated world, these things aren’t simple. An estimated half of China’s exports aren’t really “Made in China”, merely finished there. With a stronger currency, China’s exports might fall, but so would imports, dampening the effect on the trade deficit.
Entrepreneurial will could get in the way too. Imagine an exporter whose products suddenly cost 40 per cent more in dollar terms than they did before. There would be a choice: sell less and help global rebalancing - or cut prices to maintain market share, squeezing suppliers to make up for the lost profits.
That search for self-preservation could even push the pain onto China’s Asian trading partners – Taiwan, Korea and Thailand. They can't all do what China has done, replacing falling trade with massive investment. Investment as a share of GDP has fallen for Asia overall in 2009, from 29 per cent to 26 per cent, according to Citigroup.
China badly needs a new growth model, not dependent on exports or a cheap currency. It’s not too early to make plans. But a too-rapid change could tip China’s delicate transition into chaos, threaten its neighbours’ fragile economies – and might not even unwind big imbalances. Change is a priority, but currency experiments can wait.
