Krugman is wrong: Why China won’t revalue
10.23.09
For years, Americans have been fulminating about China and its policy toward currency. While many of the debates are technical and laden with econo-speak, they boil down to the simple conviction that China is unfairly manipulating its currency to keep it undervalued against the dollar. The result is to give China unfair advantages in trade - flooding the US with cheap goods, hurting labor wages world-wide, and accumulating massive surpluses in the process. That view is again articulated by Paul Krugman in today’s New York Times (http://www.nytimes.com/2009/10/23/opinion/23krugman.html?ref=opinion) which ends with the firm statement: “Something must be done about China’s currency.”
But what exactly must be done? And more to the point, what can be? Declaiming that something must be done assumes that the United States or some other world power can coerce or force the Chinese government to change their approach to currency in particular and economic policy in general. Before the crisis of the past year, Chinese authorities had actually begun a slow, quiet revaluation of the currency, but only after American politicians and officials stopped using the currency question as a cudgel against China. The recent decision of Timothy Geithner and the Obama Administration not to label China a currency manipulator marked a welcome change in tactics. Compare that choice to the much-publicized Schumer-Graham tariff of 27.5%. It never went into effect, but it hovered as a threat that if China didn’t immediately revalue its currency, dire things would follow.
But with China now accounting for nearly $1 trillion of American debt, and with the two economies in a symbiotic relationship which neither loves but which neither can escape, the U.S. cant simply insist that China do something about its currency and expect action. These economies are now fused (see my new book <em>Superfusion</em>). Much like the United States for last half of the 20th century, China is becoming a global economic behemoth. It isn’t supplanting the United States anytime soon, but it is rapidly joining the U.S. as the other most important engine of the global system. It remains much poorer and less developed, but it is generating a substantial share of global activity and its cascade can be felt from Rio to Melbourne.
Given that, why would China decide to disrupt the system simply because it causes consternation in America or Europe? Its economy is booming and its policies, however unorthodox, are working. China will again allow its currency to appreciate when it feels that doing so won’t cause a crisis of disrupt growth. Its massive accumulation of reserves is an issue. As the crisis eases, it’s likely that Beijing will return to its pre-2008 policy of gradual appreciation, especially now that it is focusing on generating domestic demand and wants greater purchasing power for Chinese citizens. But Secretary Geithner - contrary to the criticisms of Krugman and others - has been exactly right in not publicly calling out China. Such an act would be both arrogant and foolish. In the world today, the United States can afford to be neither. Let’s hope we remember that.
Tags: China, China-U.S. relations, currency, dollar, Geithner, Superfusion, trade
October 28th, 2009 at 8:24 pm
When Prof. Krugman uses terms as “rest of the world” and “world economy” - could one considers that he shares the same view from the “readview mirror” of most U.S. Americans? For example the “crisis” originated by “Wild Wallstreet Greed” and its longterm effects will concern U.S.Americans .It had put a shock into the gullible Continental Europeans. But the “rest of the world” may already be on a more promising path with less delayed effects from the “crisis”. Thus increasingly, the “rest of the world” may become less interested in what is “desirable” by U.S. Americans and not overly concerned what U.S. Congress “certifies”… Whatever the exchange rate may be - the U.S. public will suffer a declining standard and “bear the cost”. The Chinese probably seek a “soft landing” - by buying just enough U.S. treasuries to influence a benign attidute in Washington -and by using U.S. dollar reserves for investments in the “rest of the world”. Both China and Brazil worry about “hot money” flowing into their economies - and “hot money” probably is turning to many other more modest players in the approaching “multipolar world economy”.The interesting question: How will the U.S. public tolerate the looming gradual descend into a reduced level…
November 22nd, 2009 at 12:24 am
“Krugmand is wrong: China won’t revalue” - today , Nov. 22. China Daily: “Push for stronger yuan does no good”. Quotes Shawn Rein of China Market Research. “Better for American business to maintain current yuan exchange rate until worldwide economy is on firmer footing. Renminbi appreciation would lower American consumer purchasing power at time of high unemployment. Revaluation would now lead to unemployment in China which in turn would reduce American exports to China, while manufacturers would simply move to China without producing more job in U.S. Better restructure U.S., pay down debt to keep U.S. treasuries attractive”. Jeremy Warner of British Daily Telegraph is quoted with similar opinion. ( Article from Xinhua). - Interesting item: China’s Ministry of Education offers a list of 15,000 approved schools in 33 countries. Currently 80,000 Chinese students in U.S. Since 1978, 1.3 million Chinese studied abroad, until now 350,000 “Sea turtles” (Chinese affectionate term for returnees) returned to China.
November 22nd, 2009 at 12:34 am
Correction of preceding comment. Should read: …would simply move to VIETNAM without producing more jobs in the U.S. …
January 1st, 2010 at 7:17 pm
Happy New Year 2010: Today, Jan. 1st, Krugman is again whining in the NYT about the valuation of China’s currency! The Natos are mumbling too - but what is the rest of the world thinking - the other 180+ nations ? Perhaps the whole hysteria about China’s currency is just an affliction of the old “white colonials”! (Rember the old U.S.American outcry 1950: “Who lost China?”. Hints exist that the BRICs talked about dumping the U.S. dollar… Brazil had the world’s highest stock valuation increase in 2009 - 125 %, also a 25% increase of the “real” against the U.S. Dollar. The academic economists probably will disagree - but as a “man on the street” - I remember - in previous decades, Brazil (and much of Latin America) suffered several severe currency collapses - while its own economists and politicians took their cues (or “instructions”) from the Chicago Boys and the U.S. Fed. Now after eight years of the presidency of an old leftist labor union organizer with a grade school education, Ignacio Lula da Silva, Brazil practically avoided the U.S.-made “global crisis”, and is being watched by the those 180+ nations as an example of “doing it your way” - not the U.S.American way. Now just wait for the cry “who lost (influence over) Brazil ?”…