I read the following in the NY Times today:
Mr. Hu, of course, has the power, at least on paper, to reach across differing bureaucracies. Often, though, he cannot or will not. The debate over revaluing the renminbi, a constant thorn in the relationship with the United States, has not advanced much partly because of a fight between central bankers who want the currency to rise and ministers and party bosses who want to protect the vast industrial machine that depends on cheap exports for survival.
So far, the battle has made it impossible for China to act decisively - and it is struggling with inflation as a result. Mr. Obama’s aides now want to try a different tack: Rather than harp on currency, they are going to raise other economic issues and see if the pressure of rising inflation, and the fear that it could cause social unrest, will compel the Chinese to raise the value of their currency.
Never mind the references to
battles and invented factional strife. This stuff is the central theme of the article, which is why I don't want to provide a link. It's just trash. But the part I put in boldface is a theme I have seen since the Bush days: the idea that NOT allowing the currency to rise will cause inflation. Here, the author expresses the converse: by taking such measures as will cause inflation in China, the US, in fact, is applying pressure on China to appreciate it's currency. This more or less supports the view
Jantxv was putting forward.
In any case, my observation is that FROM THE POINT OF VIEW OF CURRENCY VALUATION inflation is the same as currency appreciation. In other words, overall, 10% inflation will make Chinese goods 10% more expensive on the world market, even if there's no appreciation. Conversely, 10% appreciation will do the same, even if there's no inflation.
My question is, why does the US
demand revaluation, when inflation will do the job? Is there simply a preference for friction? Why the need to
compel anything? In terms of the alleged benefits to American exports, the effect would be the same.
The Chinese govt. point of view, I think, is easier to understand. Currency appreciation not only wreaks havoc on contracts that are signed in dollars, especially for exporters of cheap stuff which run on ultra-thin profit margins, but it fans hot money flows. Inflation can be managed better by the exporters, because the wages they agree to, and the contracts with suppliers, can be coordinated with a controlled rise in export prices. And inflation
does not encourage hot money flows.
The calculation is that a 3% yearly appreciation is not high enough to make it worthwhile to the speculators (unless you add in profits from real estate speculation), so the government wants to limit currency appreciation to that. Meanwhile, inflation hurts the masses and will become a bigger problem if inflationary expectations develop. Therefore, the government is willing to allow
some inflation, and given the pressures due to loose money, a bit more than they would have accepted before.
This illogical American
insistence on currency appreciation, is actually what makes me wonder if the "conspiracy theorists" are not correct after all: the US wants to "bust" China through hot money flows.
