By FAN GANG
THE exchange rate of the renminbi has once again become a target of the United States congress.
China-bashing, it seems, is back in fashion in the US but this round appears stranger than the last one.
When congress pressed China for a large currency revaluation in 2004-05, China’s current-account surplus was rising at an accelerating pace.
This time, China’s current-account surplus has been shrinking significantly, owing to the global recession caused by the collapse of the US financial bubble.
China’s total annual surplus (excluding Hong Kong) now stands at US$200 billion (K568 billion), down by roughly one-third from 2008.
In GDP terms, it fell even more, because GDP grew by 8.7% in 2008.
Back then, pegging the renminbi to the dollar pushed down China’s real effective exchange rate, because the dollar was losing value against other currencies, such as the euro, sterling and yen.
But this time, with the dollar appreciating against other major currencies in recent months, the relatively fixed rate between the dollar and the renminbi has caused China’s currency to strengthen in terms of its real effective rate.
Of course, there are other sources of friction now that did not seem as pressing five years ago.
America’s internal and external deficits remain large, and its unemployment rate is both high and rising.
Someone needs to take responsibility, and, as US politicians do not want to blame themselves, the best available scapegoat is China’s exchange rate, which has not appreciated against the US dollar in the past 18 months.
But would a revaluation of the renminbi solve America’s problems?
Recent evidence suggests that it would not.
Between July 2005 and September 2008 (before Lehmann Brothers’ bankruptcy), the renminbi appreciated 22% against the dollar yet the quarterly US current account deficit actually increased – from US$195 billion (K554 bil) to US$205 billion (K582 bil).
Most economists agree that the renminbi is probably undervalued. But the extent of misalignment remains an open question.
Economist Menzie Chinn, using purchasing power parity (PPP) exchange rates, reckoned the renminbi’s undervaluation to be 40%.
However, after the World Bank revised China’s GDP in PPP terms downward by 40%, that undervaluation disappeared.
Nick Lardy and Morris Goldstein suggest that the renminbi was probably undervalued only by 12-16% at the end of 2008.
Yang Yao of Beijing university has put the misalignment at less than 10%.
But assume that China does revalue its currency sharply, by, say, 40%. If the adjustment came abruptly, Chinese companies would suffer a sudden loss of competitiveness and no longer be able to export.
The market vacuum caused by the exit of Chinese products would probably be filled quickly by other low-cost countries like Vietnam and India.
American companies cannot compete with these countries either. So no new jobs would be added in the US, but the inflation rate would increase.
Now assume that the renminbi appreciates only moderately, so that China continues to export to the US at higher prices but lower profits.
This would push up inflation rates significantly, forcing the US federal reserve to tighten monetary policy, thereby quite possibly undermining America’s recovery, which remains unsteady.
New difficulties in the US and China, the world’s two largest economies, would have a negative impact on global investor confidence, hurting US employment even more.
In both scenarios, US employment would not increase and the trade deficit would not diminish. So then what? – Project Syndicate
*Fan Gang is professor of economics at Beijing university and the Chinese academy of social sciences, director of China’s national economic research institute, secretary-general of the China reform foundation, and a member of the monetary policy committee of the people’s bank of China