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Why US legislators are wrong on 'manipulation'
April 5, 2010, Monday
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On March 16, five United States senators re-introduced a new bill to crack down on so-called unfair currency manipulation by countries such as China, which they say is having a negative effect on the US economy.
The proposed legislation has aroused hot debate in both countries about the pros and cons of a renminbi revaluation.
"Legislators are trying to make constituents believe that the joblessness (in the US) is caused by the trade deficit, and the trade deficit is the result of China manipulating its currency," says Charles Freeman of the Center for Strategic and International Studies, a public policy research institute based in Washington, DC, and a former assistant US trade representative for China affairs. "However, I see no correlation between joblessness and the trade deficit, as well as the trade deficit and the undervalued renminbi."
He says it's unlikely that increasing the value of the renminbi vis-a-vis the dollar will reduce the trade imbalance between the two countries.
"The labor costs are so high in the United States that it would be difficult for the US to regain competitiveness solely through forcing the renminbi to appreciate by another 20 percent," he says.
In fact, he doubts whether any increase in the value of renminbi will move production back to the US. If Chinese exports to the US were to become more expensive, "the United States would shift its demand to other third party developing countries, such as Mexico," he says.
Echoing Freeman's view is a new article titled, "The RMB: Myths and Tougher-to-Deal-With Realities," by Pieter Bottelier, a senior adjunct professor of China studies at Johns Hopkins University's School of Advanced International Studies, and Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace.
According to Bottelier and Dadush, the immediate effect of a renminbi appreciation would be an increase in prices for US consumers. "A 25 percent revaluation of the renminbi, which some economists have said is needed, would - if not offset by a reduction in China's prices - add US$75 billion to the US import bill, since the United States imports three times as much from China as it exports there," they wrote.
No correlation
That rise in costs will most likely be passed on to the consumer. As they see it, a revaluation of the renminbi on its own would do little to redress global imbalances, and could initially lead to a wider US-China trade deficit.
Zheng Hui, a finance professor at Fudan University, says: "Empirical analysis by Chinese scholars never finds a strong correlation between the appreciation of the renminbi and the reduction of China's current account surplus."
Zheng says the trade structures of China and the US are complementary. "China is specialized in producing low-cost manufacturing goods, while the United States has the comparative advantage in producing intermediary goods and high-tech products."
He says most US companies would not be negatively affected even if the renminbi depreciated and US imports from China continued to grow.
What's more, China runs a trade deficit with South Korea and Japan, because it imports large amounts of intermediary goods from those countries to support goods being manufactured in China for export, he says. So it is the East Asian region as a whole that is partly responsible for the US trade deficit.
But Zheng warns that a rigid peg of the renminbi to the dollar is undesirable. In his view, there will be a price distortion between tradable commodities and non-tradable commodities in China if the country continues to peg the renminbi to the dollar.
"(With such a peg,) China's exporting sector would keep growing while other sectors, such as the services producing non-tradable commodities, would never develop, and the economy would continue to grow unhealthily, with a negative impact on China's long-term economic development," he says.
William Helkie, adjunct professor at the University of Maryland in College Park in the US and a former senior adviser at the US Federal Reserve, cites another negative impact of the renminbi remaining pegged to the dollar. "A large amount of capital denominated in US dollars flows into China seeking investment opportunities. In order to maintain the peg between the renminbi and the US dollar under the fixed exchange rate regime, China's central bank has to buy all the extra US dollars at the fixed rate and place them on its balance sheet. So the high-powered money on the central bank's balance sheet would go up, resulting in an increase in the money supply in China."
That growth in money supply, he adds, "would either result in the increase of the price in the goods market, or the increase of the price in the asset market. The latter is exactly what China experienced in the past two years - periodic real estate and stock market booms that heighten the financial risk."
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton. The views are its own. Shanghai Daily condensed the article.)
The proposed legislation has aroused hot debate in both countries about the pros and cons of a renminbi revaluation.
"Legislators are trying to make constituents believe that the joblessness (in the US) is caused by the trade deficit, and the trade deficit is the result of China manipulating its currency," says Charles Freeman of the Center for Strategic and International Studies, a public policy research institute based in Washington, DC, and a former assistant US trade representative for China affairs. "However, I see no correlation between joblessness and the trade deficit, as well as the trade deficit and the undervalued renminbi."
He says it's unlikely that increasing the value of the renminbi vis-a-vis the dollar will reduce the trade imbalance between the two countries.
"The labor costs are so high in the United States that it would be difficult for the US to regain competitiveness solely through forcing the renminbi to appreciate by another 20 percent," he says.
In fact, he doubts whether any increase in the value of renminbi will move production back to the US. If Chinese exports to the US were to become more expensive, "the United States would shift its demand to other third party developing countries, such as Mexico," he says.
Echoing Freeman's view is a new article titled, "The RMB: Myths and Tougher-to-Deal-With Realities," by Pieter Bottelier, a senior adjunct professor of China studies at Johns Hopkins University's School of Advanced International Studies, and Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace.
According to Bottelier and Dadush, the immediate effect of a renminbi appreciation would be an increase in prices for US consumers. "A 25 percent revaluation of the renminbi, which some economists have said is needed, would - if not offset by a reduction in China's prices - add US$75 billion to the US import bill, since the United States imports three times as much from China as it exports there," they wrote.
No correlation
That rise in costs will most likely be passed on to the consumer. As they see it, a revaluation of the renminbi on its own would do little to redress global imbalances, and could initially lead to a wider US-China trade deficit.
Zheng Hui, a finance professor at Fudan University, says: "Empirical analysis by Chinese scholars never finds a strong correlation between the appreciation of the renminbi and the reduction of China's current account surplus."
Zheng says the trade structures of China and the US are complementary. "China is specialized in producing low-cost manufacturing goods, while the United States has the comparative advantage in producing intermediary goods and high-tech products."
He says most US companies would not be negatively affected even if the renminbi depreciated and US imports from China continued to grow.
What's more, China runs a trade deficit with South Korea and Japan, because it imports large amounts of intermediary goods from those countries to support goods being manufactured in China for export, he says. So it is the East Asian region as a whole that is partly responsible for the US trade deficit.
But Zheng warns that a rigid peg of the renminbi to the dollar is undesirable. In his view, there will be a price distortion between tradable commodities and non-tradable commodities in China if the country continues to peg the renminbi to the dollar.
"(With such a peg,) China's exporting sector would keep growing while other sectors, such as the services producing non-tradable commodities, would never develop, and the economy would continue to grow unhealthily, with a negative impact on China's long-term economic development," he says.
William Helkie, adjunct professor at the University of Maryland in College Park in the US and a former senior adviser at the US Federal Reserve, cites another negative impact of the renminbi remaining pegged to the dollar. "A large amount of capital denominated in US dollars flows into China seeking investment opportunities. In order to maintain the peg between the renminbi and the US dollar under the fixed exchange rate regime, China's central bank has to buy all the extra US dollars at the fixed rate and place them on its balance sheet. So the high-powered money on the central bank's balance sheet would go up, resulting in an increase in the money supply in China."
That growth in money supply, he adds, "would either result in the increase of the price in the goods market, or the increase of the price in the asset market. The latter is exactly what China experienced in the past two years - periodic real estate and stock market booms that heighten the financial risk."
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton. The views are its own. Shanghai Daily condensed the article.)
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