Renminbi Appreciation

January 16, 2007

And now for a bit of IPE….

Are Chinese leaders keeping the value of the yuan artificially low in order to subsidize their export sector, a sector which is an economically and hence politically crucial constituency for the current regime?  

If that was ever the case,  this AP story about how China’s exporters are suffering as a result of the yuan’s gradual appreciation seems to indicate that the government is resorting to limited currency appreciation because its fear of inflation is outweighing its need to accommodate the export sector.

That is not to say that export sector employment worries are not important, but they pale in comparison to worries about widespread inflation.  As Stanford’s Andrew Walder reminded a HKU audience a few weeks ago, while maintaining high levels of employment in politically strategic sectors is of course a major concern for Chinese leaders, historically it hasn’t been unemployment that has been so destabilizing to Chinese domestic politics, but inflation.

Inflation is more politically destabilizing then unemployment because it effects virtually everyone.  Inflation was a serious problem in China in the 1980s, when unofficial rates reached upwards of 25% late in the decade.  During the 1989 demonstrations, [inflation] was a major source of urban discontent…

I actually think that a major reason for the Chinese leaders not allowing for earlier currency appreciation has less to do with protecting vested domestic interests and more to do with their fear that domestic consumption would not yet be able to compensate for the negative economic impact of a stronger yuan. 

The Chinese government has been focusing on ways to increase domestic rates of consumption for some time now, but I wouldn’t advise my Mainland friends to dip into their savings just yet.  They will need this savings to buy a home, fund unforeseen health care expenses, cover rising education expenses, and eventually support their own old age.  Until a more effective public/private social security system exists on the Mainland, a high rate of savings is an individual’s best insurance for the future.   

Chinese leaders know this, but recent inflationary pressures have left them with little choice but to allow for limited appreciation regardless of the negative impact lower export sector profitability will have on the overall economy.

There are of course a host of other relevant issues that factor into these monetary decision making processes, but I’m optimistic that China’s leaders will continue with their masterful economic balancing act.  What is my optimism based on?  Mostly on the smart and humane people whom I see working on these issues, coupled with the CPG’s impressive economic track record thus far.   That said, you should also know that I have a tendency to be naively optimistic.  Afterall, I believed US leaders when they told us that Iraq possessed WMDs…  


One Response to “Renminbi Appreciation”

  1. Iris Says:

    An article written by Joe McDonald of Washington Post on 15th Jan 2007 titled “China exporters suffer as currency rises” concluded the result of yuan appreciation as follows:

    “Beijing embarked on exchange-rate reform as part of a long-term effort to make its financial system more flexible. The government says it will eventually let the yuan trade freely on world markets and will end barriers to the movement of money in and out of the country… Beijing is trying to reduce its dependence on low-profit exports by encouraging China’s own consumers to spend more and prodding companies to invest in creating new technologies and brand names.”

    The writer does not think the yuan appreciation would cause an overwhelming loss to the China economy. With US$1 trillion reserves in China’s central bank, the country is now exploring a novel path to develop its economy, hence striking a better balance in imports and exports for the benefit of sustaining a more healthy trade relationship with the rest of the world.

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