Jan 20th 2005
From The Economist print edition


The case for a big revaluation of the Chinese currency is weaker than commonly claimed


MANY policymakers and economists argue that the Chinese yuan, pegged for a decade at 8.28 to the dollar, is grossly undervalued, and that a revaluation is essential to reduce America's huge current-account deficit. The issue is likely to be high on the agenda at the next G7 meeting of finance ministers and central bankers on February 4th and 5th, to which China has been invited. Figures last week, showing a further widening of America's trade deficit and a big increase in China's surplus, have surely increased the pressure on China.

However, in a new paper, “To Be a Rock and Not to Roll”, Stephen King, the chief economist of HSBC bank, exposes several myths behind the conventional arguments for a revaluation of the yuan. The first is that China's large and growing trade surplus with America proves that the yuan is undervalued. China's surplus with America is offset by a deficit with other Asian countries (see left-hand chart), from which it imports capital equipment and components. As a result, China's overall trade surplus was a modest $32 billion last year, smaller than in the late 1990s and peanuts compared with America's trade deficit of over $600 billion. Nor does the extraordinarily rapid growth in Chinese exports prove that its currency is too cheap: imports have also been rising rapidly.



But what about the huge increase in China's foreign-exchange reserves, which jumped by almost $100 billion in the fourth quarter of last year? To prevent the yuan rising against the dollar, the People's Bank of China is being forced to buy vast amounts of American Treasury securities. Surely, that proves that the yuan is being held below its market rate? Not necessarily. Much of the increase in reserves reflects inflows of short-term capital, from investors taking advantage of higher interest rates in China or speculating on a revaluation. In the long term, if China scrapped its controls on capital outflows, the yuan might well fall as Chinese households diversified into foreign assets.

 It is true that because of its peg to the dollar, the yuan's real trade-weighted exchange rate (adjusted for inflation differences with other countries) has fallen by 13% since 2001. But on a longer view the Chinese currency looks less cheap. Between 1994 and 2001, it gained 30%, dragged up by a rising dollar (see right-hand chart). Those who accuse the Chinese of pursuing a cheap-yuan policy conveniently forget that during the East Asian crisis China let pass the chance to devalue its currency in line with most of its neighbours.

 Perhaps the biggest myth of all, says Mr King, is that the yuan's value is the only stumbling block to reducing America's current-account deficit. China accounts for less than 10% of America's total trade so a 10% revaluation of the yuan—as much as might be reasonably expected—would reduce the dollar's trade-weighted value by only 1%. If it were matched by a 10% rise in all other Asian currencies, then the dollar's trade-weighted index would fall by 3.7%. But even that is small compared with the dollar's decline of 16% since early 2002, let alone with what would be needed to cut America's current-account deficit to a sustainable level. Assuming no other policy changes, HSBC estimates that the dollar needs to fall by a further 30% to reduce the deficit to 2-3% of GDP.

Another reason why any plausible revaluation of the yuan would do little to reduce America's trade deficit is that China's exports have a high import content, which limits the impact of exchange-rate movements on export prices. For example, the Chinese value-added (in parts and labour) in a mobile phone exported to America might be only 15% of its price. So a 10% revaluation would raise its price in dollars by only 1.5%.

A lot of hot air

In addition to claims that “China is stealing our jobs”, another popular argument for revaluing the yuan is that the Chinese economy is overheating, because a fixed exchange rate forces the country's authorities to run an overly lax monetary policy. Rising foreign-exchange reserves boost the money supply, causing higher inflation and excessive bank lending. A rise in the exchange rate, it is argued, would give the central bank proper monetary control. The snag is that a small revaluation is likely to increase expectations of another future appreciation, attracting yet more speculative capital and swelling foreign reserves further. To discourage speculation would require a much larger revaluation than the Chinese are likely to accept.

Some economists argue that as China gets richer it needs to allow its real exchange rate to rise, in order to reap the full gains of its economic success. A stronger exchange rate would boost consumers' purchasing power, by allowing them to buy more foreign goods. At present, growth is too dependent on exports, while consumption is weak. However, an increase in the real exchange rate need not require a rise in the nominal rate. Instead it could come about through higher inflation than in countries abroad—as occurred in Japan in the 1950s and 1960s.

Mr King concludes that the biggest problem for China's current exchange-rate policy is not the yuan itself but the performance of the dollar. A fixed exchange rate is supposed to provide stability. So if the dollar continues to fall, China may wish to switch to a more reliable store of value and unit of account. One alternative is a currency basket reflecting the pattern of its trade. China already trades more with the European Union and Japan than with America.

 The real blame for America's current-account deficit lies with its lack of saving, not the Chinese yuan. Last year, Li Ruogu, the deputy governor of the People's Bank of China, warned the United States not to blame other countries for its economic difficulties. He said that foreign pressure would not force China to move faster to free its exchange rate. It would indeed be ironic if a change in China's exchange-rate policy came not as a result of American pressure, but from China's own disillusion with the dollar as an international reserve currency.

From <<The Economist>>website.
Original URL on Official Site
---------------------------------------

小男孩点评:
    从2003年开始,西方要求人民币升值的叫嚣此起彼伏,不绝于耳.现在中国foreign-exchange reserve 依然是节节飙升到609.9billion dolar. 而美国国内财政赤子,在国内减税政策,对外战争的双重作用下也是创下了记录.而且美元对欧元和日元的ER也继续刷新历史新低.于是乎要求人民币升值的呼声 更是有增无减.那么是不是如西方鼓吹的那样,只要人民币升值,那么现在世界货币体系面临的问题就迎刃而解了呢？本文作者对这个问题提出了一个看法,那 就是:要想解决美国deficit的问题,美国政府最好从自身的经济政策入手,不要把责任都抛给别人.
    另外,关于美元贬值,中国的FER持续攀升的现象,我也曾经和一个在DBS工作的学长讨论过.我们的结论似乎认为这个以美元为基础的布林顿森林货币体系崩 溃之后的经济体系似乎也到了重新考虑的时候了..因为美国不可能总是开出空头支票.总有一天要求兑现的.后来在网上查了一下,似乎1971年时德国,日本 的情况和现在的中国十分相似,由于国内经济的突飞猛进,GDP增长率持续超过美国,造成资本市场美元持续疲软,而马克和日元升值压力越来越大.唯一不同的石当时 的美元是与黄金挂钩的,这就直接导致了金融时常投机狂潮和美元兑取黄金的压力.最终迫使尼克松宣布取消美元和黄金的挂钩,布林顿体系解体.
    而现在的情况是,美元的持续疲软似乎没有什么可以依附,这样,似乎美元的疲软就预示着中国手里的FER随时会变成空头支票.当然高FER也让最近中国资本 市 场比较阔绰.正是在这种高FER的情况下,国有企业纷纷在国际资本并购和重组市场大方出手,TCL和汤姆生,Lenovo和IBM等等.也正是因为有高 FER,中航油出事之后,中国政府才毫无估计的拿出了几个亿注入其中,一图中航油免于破产的境地.也正是基于高FER,中国的四大国有银行才敢准备上市试 水.如果现在不试水,等到年底金融市场全部放开,那么其结果 是可怕的.