Tuesday, January 16, 2007

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A question that will haunt protectionists and free traders alike

The Financial Times' Richard McGregor notes that China is making somewhat louder noises about continued appreciation of the renminbi:

The Chinese ministry responsible for promoting exports has backed a further appreciation of the renminbi, removing one of the last remaining institutional lobbies in Beijing against a stronger currency.

A think-tank attached to the commerce ministry said that an “appropriate or modest” appreciation of the renminbi would benefit China’s economy and trade “in the long run”.

“In the near term, a 3 per cent appreciation of the renminbi every year will not have an obvious or apparent influence on the overall increase of China’s trade,” said the report, which was posted on the ministry’s website.

The ministry said previously a 3 per cent appreciation would wipe out the profits of many exporters because of the razor-thin margins under which businesses operate. However, the ministry’s position has become increasingly untenable, with the trade surplus soaring during the past 18 months, a period in which the renminbi appreciated by more than 6 per cent against the US dollar. (emphasis added)

Six percent is not a lot, but clearly it's trending in the right direction. Which leads to an interesting thought -- if the renminbi continues to appreciate, but the bilateral deficit is not seriously affected, what does this mean for trade politics in this country?

Protectionists will be robbed of the easy crutch that the U.S. runs a large trade deficit because of China's unfair trading practices.

But free traders will be robbed of the argument that letting exchange rates float maes it easier to correct for current and capital account imbalances (see this Brad Setser post for more on the oddities of current global investment trends).


posted by Dan on 01.16.07 at 10:40 PM


US inflation was a couple of points higher than Chinese inflation. during the period when there was no movement, US inflation was also often a couple of points higher than Chinese inflation. in real terms, the RMB hasn't changed v. the $ much, if at all, over the last 6 years.

Chinese productivity growth has been faster than US productivity growth, so China has gained a relative cost advantage. A much bigger nominal appreciation than 6% is needed to offset inflation and productivity differentials over the past few years.

Moreover, during the period when the RMB rose by 6% in nominal terms v the $, the $ fell by more than that (over 10%) against China's biggest trading partner these days (Europe). In real effective terms, the RMB hasn't moved since mid 05. And it is still well below where it was in 2000 or 2001.

If the RMB appreciates significantly on a broad based basis (after adjusting for inflation differences) and China's export growth rate doesn't slow, then I think there would be real cause for debate. But that hasn't yet happened. The available data (see Goldman) suggests the real depreciation of the RMB from 02 on did play a role in the acceleration in Chinese export growth ...

way too much emphasis here is being placed on the nominal RMB/ $.

posted by: brad setser on 01.16.07 at 10:40 PM [permalink]

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