Sunday, September 19, 2010

Excellent New York Times journalist Sewell Chan on The U.S.-China Exchange Rate.
Would China benefit by letting the renminbi rise?
Yes, most experts agree that China would probably be better off if the renminbi’s value rose. Doing so would give Chinese consumers more purchasing power, lessen the risk of inflation and asset bubbles, and potentially reduce stark inequalities that have contributed to social unrest.
What’s stopping China, then?
Exporters, concentrated along the southern coast, wield enormous clout in Beijing and benefit from an undervalued currency, said Minxin Pei, a political scientist at Claremont McKenna College in Claremont, Calif. So do state-owned enterprises, which have excess capacity and need to be able to sell goods cheaply abroad. China’s importers are unhappy with the undervalued renminbi -- as are officials at the central bank -- but both groups are relatively weak.
In the United States, there must be someone against a stronger Chinese currency, right?
Large multinational corporations, and Wall Street, are comfortable with a weak renminbi. Many of the biggest American conglomerates make goods in China (or sell them in the United States) and benefit from the undervalued currency. Financial services companies find deal-making easier with a strong dollar and want to help invest the capital sloshing around China.
But aren’t the forces on the other side just as strong?
A high dollar places tremendous competitive pressure on American agricultural producers and domestic manufacturers, and thereby hampers job creation.
So, it’s not surprising that Midwest politicians and labor unions have been among China’s fiercest critics. High unemployment has also prompted the White House and most Congressional Democrats (and a substantial number of Republicans) to side with the critics.
Emphasis added in first answer. I would disagree with Chan and argue that if (when?) "Chinese consumers" get more purchasing power, this could contribute to unrest as one-party rule of the Chinese Communist Party could be challenged. Other nations have evolved from one-party states to multi-party democracies, but it could be messy in China given the size and poverty of the country. Having said that the Chinese have managed their economic growth and the economic crisis well. Chan may be right that reduced inequality would help mollify unrest, but I doubt it.

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