…To judge from the international institutions which were shoved into the fray over RMB appreciation on Wednesday, including the World Bank and UNCTAD. At least it means the debate is now getting to the broader problem — imbalances.
China bears, time to take note.
First up — the World Bank’s latest Quarterly Update on China is all about structural reforms to the country’s overheating export and property markets. As far as the Bank is concerned, those reforms now include strengthening the renminbi:
The key task for monetary policy in 2010 is to help mitigate the major macro and financial risks: high inflation expectations, unwarranted property price increases, and strained local government finances…
Inflation expectations and pressure can be contained by tightening the monetary stance and allowing the exchange rate to strengthen…
…Higher interest rates would make the tightening more convincing. A stronger exchange rate helps reducing inflation pressures by lowering the price of imports and toning down demand. It also helps rebalancing China’s pattern of growth towards more services and consumption and less industry and investment.
Unless, of course, you believe UNCTAD instead. In a recent policy brief, the UN trade body would appear to agree with Goldman Sachs that renminbi appreciation will get on quite fine by itself, thank you:
In fact, as a response to the current global crisis that originated elsewhere, China has done more than any other emerging economy to stimulate domestic demand, and as a result its import volume has expanded significantly. Private consumption is rising at breakneck speed…
…Expecting that China will leave its exchange rate to the mercy of totally unreliable markets and risk a Japan-like appreciation shock ignores the importance of its domestic and external stability for the region and for the globe.
Er… OK. But perhaps someone should tell UNCTAD that China has rather unreliable markets somewhat closer to home — which may upset domestic stability quite a bit all by themselves. On that, China bubble data point du jour comes from Takatoshi Ito’s op-ed in Wednesday’s FT. In which Ito also advocates revaluation.
At any rate, it looks like what FT Money Supply have called the ‘pragmatic’ argument for a stronger RMB – inflation-busting – has received some wind in its sails in recent days. Thanks, no doubt, to the publicity given to Monday’s ‘currency manipulator‘ letter from US Representatives. Or what FT Alphaville likes to call the ‘nuts’ argument.
One last RMB-related bearish observation, however.
China financial markets-watcher Michael Pettis has a brilliant post up on what revaluation would really do to rebalancing — perhaps not very much, in the long term. It’s worth reading in full, but we liked this point on the short-term dangers:
A rebalancing is necessary for China, as nearly everyone in the leadership knows. This will involve, among other things, a significant revaluing of the currency. But rebalancing cannot happen too quickly without risking throwing the economy into a tailspin…
…if China is forced to revalue the currency too quickly, it will have to enact countervailing policies — lower interest rates, suppress wages, increase credit and subsidies — to protect the economy from falling apart, and these will exacerbate other imbalances that may be even worse than the currency misalignment.
Be careful what you wish for, America.
Related links:
China as currency manipulator: reality check, please – FT Alphaville
Reining in the Chinese inflation dragon – FT Alphaville
Currency wars: US v China – Lex / FT
China and Germany unite to impose global deflation – Martin Wolf / FT