Harping on the RMB

I truly love the (state controlled, voice to the outside world) China Daily. There is a wonderful purity to the worldview it conveys. It never disappoints -- as with this front page story yesterday setting the stage for the latest meetings in the US-China "Strategic Economic Dialogue" series.


Those urging the U.S. to stop harping on currency values turn out to be two Chinese analysts, one at a government agency. Who needs to hear from financiers, business people, economists, or, ahem, experts from any other country!

As it happens, I too have been continually urging American politicians to stop harping on beating their gums about the "rigged" Chinese currency, notably here and here -- mainly because, until quite recently, it was already rising in value. Moreover, the obsession with the RMB seemed mainly to show a failure of imagination on the US side: it was the only thing Americans could think of to "do" about China's trade surpluses.

Yes, the Chinese government was obviously "managing" the currency's rise and keeping it unnaturally low to help exporters (as explained blow-by-blow here). But U.S. discussion seemed based on the assumption that this was the secret of China's export boom. As I heard constantly from the foreign and Chinese business people I visited in factories and export shops and quoted in those stories, it was at best a secondary factor.

Now things are different. China's exporters, like businesses in every part of this recession-slowed world, are losing orders and laying off workers. This is tough for them -- as the counterpart is tough everywhere else. In response, governments elsewhere in the world are taking steps that, at a minimum, should not worsen conditions for other economies. That is, they mainly are mounting stimulus programs to keep people buying, whether from domestic  suppliers or foreign sources. China too has of course announced a huge stimulus program.

Yet there are increasing rumbles of China's desire/intent to do something that would in fact aggravate problems elsewhere: trying to help its exporters by pushing the RMB's value down again, after two-plus years of letting it rise.  In essence, this would be a game of exporting unemployment -- yes, yes, with all caveats about Chinese people being on average so much poorer than Americans or Europeans and suffering so much more when laid off.

Some very interesting economic discussions in and around China concern exactly this issue. Will the government try to devalue the RMB again? Should it try? Could it succeed? And if it tries, how will other countries respond? Could this be the step that turns a "contained" international economic crisis into something worse?

This subject is so complex, deep, and fast-changing that there are countless angles to explore. For now, as a first installment, after the jump are excerpts from my friend Andy Rothman's "Sinology" newsletter for CLSA, arguing that on balance the Chinese authorities won't take this step. (Proprietary newsletter, so no web link.) More on this theme to come.

Rothman's newsletter says:

There are several reasons why we doubt Beijing is embarking on a significant depreciation with the objective to boost exports:

First, China has the fiscal capacity to stimulate domestic investment and consumption, which can have a much larger, more immediate impact on growth and job creation.

Second, Beijing has other tools to help struggling Chinese exporters.  The government has already, for example, reinstated export tax rebates, cancelled some export taxes and frozen the minimum wage...

Third, RMB devaluation would spark competitive devaluations across the region, blunting the impact on Chinese exports.

Fourth, many Chinese goods are already very price competitive, which is why overall export growth was 20.5% during the August-October period...

Finally, a significant devaluation would generate an uproar in the US Congress, provoking conflict with the Obama Administration even before it is sworn into office.  It is hard for us to see why Beijing would want to do this given the other options it has for stimulating growth.