The Real Reason China Resists on the RMB

As reported yesterday, the US-China "currency manipulation" showdown is past for the moment. The underlying issue -- China's insistence on keeping its RMB at an artificially low level, which ends up keeping the US dollar artificially high -- is far from resolved. But it won't be forced to a head this month.

That doesn't mean that our coverage is over! Herewith a note from Bill Bikales, an American economist who has lived for years in China, about how the situation looks from Chinese officialdom's point of view. I think his explanation is right, and it's different from what I've seen elsewhere spelled out quite this clearly. He writes (emphasis added):

Thank you for reminding your readers that while the RMB is undoubtedly manipulated and undervalued this is not a matter of great relevance to US growth and employment.

We both know that China is not particularly inclined to accept US advice, or pressure, on this or any other important policy matters. But I think that the "China never gives in to foreign pressure because of its century of humiliation" explanation that appears so often in the press is superficial and misleading.

As I see it, China is asking a question to which there is no easy answer; what right does the US have to lecture anyone on economic matters now, having played so large a part in causing the current global recession through loose monetary policy, poor risk management by some of our most prestigious companies and monumental regulatory failures? They are responding to the continued US belief in American exceptionalism, that we can do whatever we do, right or wrong, and ignore the criticisms and demands of other countries who often bear the consequences of our actions, while we continue to insist on our right to criticize and make demands on them. As Brad Delong and Stephen Cohen have pointed out, the US simply no longer has the economic clout to get away with this any longer, and who better than China to stand up to it?

As far as the RMB goes, surely it is far more important for the global economy that the US deals with its huge fiscal problems than that China lets the RMB appreciate? To which we reply - reasonably enough - that this is not the time to do so, yet, until we've recovered from the recession. (Although many doubt, also with good reason, that we will deal with the fiscal mess even then.) But in that case China's leaders expect us to accept their own assurances that they are also going to deal with the RMB issue once the global recession has passed and they are confident that they can do so without causing a major slowdown and loss of jobs in their country. As they were indeed doing before the financial crisis. Yes, we had no or negative growth over the last two years, and China had 9-10% percent growth in both, but our standard of living is still 15 times greater than theirs. Their imperative to keep growing rapidly in order to catch up with the advanced economies is as powerful to them as is our own need to shift from -2% growth to +3%.

It is this underlying asymmetry in the whole RMB brouhaha that China is responding to.

And all I have to add is: Happy Easter.