David Leonhardt is very good on the issue of China, and his column today is no exception. First, he calls intellectual property violations the "real problem with China," which he illustrates with a single statistic: "China has become the world's second-largest market for computer hardware sales -- but is only the eighth-largest for software sales" (... the implication being that China either uses computers for furniture, or steals most of its software).
Second, he makes the important but often overlooked point that although China's currency is obviously undervalued, Chinese inflation is raising prices in China the same way a currency appreciation might.
Without taking inflation into account, the renminbi has risen 3 percent against the dollar since last summer, when China began letting it rise. Once inflation is accounted for, the real increase has been about 5 percent. At that pace, the renminbi could erase its artificial undervaluation -- as some economists estimate it -- in less than two years.
The U.S. government wants to pressure China to raise the value of the RMB. With a stronger RMB, Chinese products would cost more for Americans, and American products would be more affordable in China. But consider the impact of inflation. Chinese prices are up 5 percent over last year. That means the price of bread, and hand baskets, and electronics is higher for both American and Chinese consumers.
It's not clear whether this is good or bad for our trade deficit. If we pay more for the same basket of goods, our imports rise; alternatively, if high Chinese prices cause us to buy domestically, our imports fall. Either way, it's definitely not good for Chinese consumers, for whom China's cheap currency policy is making life very expensive.
The central bank has been pumping out currency at an ever-accelerating pace over the past decade to limit the renminbi's appreciation against the dollar. That strategy has helped preserve a competitive advantage of Chinese exporters by keeping their prices relatively low on global markets -- while also protecting the jobs of tens of millions of Chinese workers in export factories.
Now, though, that cheap currency policy seems to be reaching its limits. The extra renminbi are feeding inflation. That is starting to undermine exporters' price competitiveness -- just as a stronger renminbi would do if Beijing was not intervening to begin with.
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