China’s modest move to allow appreciation of the renminbi is driven as much by politics as by economics. It might allow American politicians to say they “got tough with China,” even though this hardly means the Chinese currency is actually floating and assuming its true market-based value. It gives China cred headed into the G-20 meeting.
In economic terms, the renminbi has remained at a stable peg against the dollar throughout the Great Recession, not only to protect Chinese manufacturers and exporters, but to retain the value of the country’s huge foreign exchange holdings. Without the social safety net that Western countries enjoy (until the deficit hawks have their way), China is extremely dependent on job creation and retention to keep social peace. Thus, keeping the currency artificially low to spur exports will remain an imperative.
American critics who rightly argue that the low renminbi hurts exporters and jobs here are unlikely to be silenced. New York Sen. Charles Schumer criticized China for backing off a pledge to end the peg to the dollar.
So the danger of tit-for-tat protectionism, or worse, remains. According to the blog Zerohedge.com, The revaluation “will allow both China and the U.S. to cool off before either side does something to precipitate a trade war,” as remarked by Raghuram Rajan, economics professor at the University of Chicago and former chief economist at the International Monetary Fund.
On the other hand, until China can become more import-friendly, the imbalances that cause criticism, and will eventually hurt the ability of Americans to buy Chinese exports, will remain a burr under the world economic saddle.
Today’s Econ Haiku:
At the G-20
All will have a fine old time
They have jobs, you know…