I saw an article on January 21, 2010 by Wharton’s on Chinese currency policy which stated that, in the long run, it is beneficial to China if it allows RMB to float over time. New York Times’ Krugman also warmed that China’s currency is predatory.
I don’t think that’s a good idea.
Critics say that a fixed-currency policy makes Chinese goods artificially cheap on world markets; helps China grow its exports and reduce its unemployment rates. However, these critics argue that this is unfair to competitors in other countries. They say that people buy Chinese goods because it is cheap, not because it is the best.
China is doing that because China is looking after its own interests. And what’s wrong with that? Every country does the same thing.
The other argument against an artificially low currency is that it feeds into inflation. But the central bank can adjust the exchange rate when it sees fit if it deems a stronger RMB is necessary. Raise RMB’s value by 20 to 30% as suggested by many experts means that China’s exports will suffer resulting in higher unemployment rate in these industries. This may cause social upheaval which is highly undesirable when export has down by as much as 30+%.
Keeping RMB low also resulted in huge foreign currency reserves being held by the Chinese government. As such, it helped to lower the interest rate in the United States which stimulated American’s economy. Without a lower RMB, hence a lower interest rate, America’s economy will suffer even more than it has been in 2008 and 2009.
Some experts argued that a higher RMB will reduce trade surplus with the US and create America jobs. But Americans have to pay more for goods at Wal-Mart if RMB is allowed to strengthen. Is that what Americans really want?
I think the biggest reason why China didn’t want to float its currency is this:
Allowing RMB to float freely means that Chinese government has to hand the control of its currency to currency traders and foreign central banks. No matter how much foreign reserves a country has, it is hard to compete with currency traders to manipulate its currency on the open market.
Look at Japan, its currency is so strong it practically killed its export industries except a few that have dominated the world market such as auto, electronics and a few others. It can not compete in many other industries which partially contributed to its stagnant economy and higher unemployment rates during the past 20 years. Japan has limited options to change its currency in order to compete with foreign countries. In this regard, the U.S., British, France and Germany were the key architects who through coordinated effort (The Plaza Accord) forced Japanese Yen to strengthen in the early 1990’s.
As a result, the Japanese economy crushed in early 1990’s and has suffered its worst set back since after WWII till this date.
China is determined not to follow Japan’s footsteps.
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