ajtr
BANNED
- Joined
- May 25, 2010
- Messages
- 9,357
- Reaction score
- 0
Now, Will China Get It?
Published: November 13, 2010
American economic leadership seems to be on its heels. At the meeting of 20 leading economies in Seoul last week, China resisted Washingtons demands to stop manipulating its currency and rallied Germany and Brazil to criticize the Federal Reserves plan to inject billions into the economy. G-20 leaders also shrugged off an American proposal to set targets to reduce trade surpluses and deficits, calling instead for vague guidelines.
Summit meetings rarely produce breakthroughs. And despite these seeming defeats, the Obama administration may be close to achieving one of its core objectives. Internal economic pressure may finally force Beijing to let the value of its currency rise. That would be good for the United States economy, the global economy and Chinas economy. The cheap renminbi that helped build China into the worlds export powerhouse is now overheating its economy. Despite the bluster in Seoul, some Chinese officials are suggesting the country could better manage these pressures if it let the currency rise.
A cheap renminbi doesnt just increase the price of imported goods for Chinese consumers. To hold down the value of its currency, the central bank must print renminbi to buy all the dollars flowing in. This is fueling inflation and bubbles in housing and stocks.
Trying to cool things down, the central bank raised interest rates last month for the first time since 2007. Last week, it told banks to hold more money in reserve and lend less. A rising renminbi would lower the price of imports and give the central bank more control over its money supply.
China has successfully followed this policy before. From 2005 to 2008, the renminbi rose a fifth against the dollar. This helped contain inflation as commodity prices rose around the world. It increased domestic consumption. The growth of Chinas trade surplus slowed. And China continued to grow by double digits until the financial crisis slammed the brake on the world economy, leading Beijing to abruptly reverse policy.
Reviving such a policy today would also do the world economy enormous good, taking pressure off countries whose manufacturers are struggling to compete with artificially cheap Chinese exports. It would create space for them to combat their own inflationary pressures by letting their own currencies rise.
Whether Chinas political leaders always nervous about anything they cant fully control get it is not clear. But no amount of bluster, or fearfulness, can paper over the damage caused by the cheap renminbi policy.
