What's behind U.S. pressure on renminbi exchange rate?

08:21, February 20, 2010      

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U.S. political rhetoric has recently been obsessed with the exchange rate of the renminbi. President Barack Obama has indicated on several occasions that he would take a tougher stance on this issue in order to address trade imbalances between his country and China.

But does the renminbi hold the key to this issue? What are the backstage calculations behind those demands from Washington?

RENMINBI A WRONG TARGET

While addressing Democratic senators early this month, Obama said the issue of renminbi exchange rate must be addressed to ensure that American products will not be put into a huge competitive disadvantage given the fact that China is going to be one of America's biggest markets.

In an interview with Businessweek on Feb. 10, Obama said he and Chinese leaders are going to have some "very serious negotiations" on the renminbi issue.

Supporters of Obama include economists such as Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. Those experts say China's huge trade surplus is a result of an undervalued renminbi. Appreciation of the Chinese currency, in their view, would re-balance China's international trade.

However, the validity of such argument is questionable.

The Japanese yen, for example, has been appreciated enormously against the U.S. dollar over the past 40 years. Yet Japan's trade surplus with the United States has been continuously on the increase over the same period.

The case with the Japanese yen has clearly demonstrated that international payment is not necessarily entirely linked to currency exchange rates. International trade balance is rather determined by international division of labor and product competitiveness.

Stephen King, chief economist of the HSBC bank, said it is unreasonable to simply attribute China's big trade surplus to an undervalued currency. China's high savings rate is a more important factor in this respect, he told Xinhua.

Nobel Prize laureate Andrew Michael Spence shared King's argument.

"Reducing the surplus in China involves deep structural change, much as reducing the U.S. deficits does. China's high savings are embedded in the structure of the economy," Spence wrote in Jan. 21's Financial Times.

Without structural change, an appreciation of the renminbi might well lead to continued high savings and slow economic growth in China, rather than to a reduction of China's trade surplus, he wrote.

International Monetary Fund (IMF) chief economist Olivier Blanchard believes that renminbi appreciation is not a solution for the U.S. economy.

According to an IMF model, the American GDP will grow by 1 percent when the renminbi appreciates by 20 percent and other major Asian currencies also appreciate by a similar margin, he told Xinhua.

"This would be good news for U.S. growth. But this is clearly not enough, by itself to sustain growth in the United States," said Blanchard.

World Bank chief economist and Vice President Justin Yifu Lin also said that the appreciation of the renminbi will not solve the problem of trade imbalance between China and the United States. On the contrary, such a move might damage both economies.

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