Wednesday, August 10, 2011

Meanwhile, in China...

Little noticed in all the news is that China is letting its currency appreciate at a little faster pace this month.  Back in May, Laura D'Andrea Tyson penned this piece in Economix, pointing out that the renminbi was appreciating in real terms:

"With inflation hitting 5 percent annually in China last month, the renminbi has appreciated in real terms by 8 to 9 percent relative to the dollar during the last year. According to calculations by The Economist, since 2005, when China  adopted its managed-band system, the renminbi has appreciated about 24 percent in nominal terms and about 50 percent in real terms relative to the dollar."

Today, the renminbi hit a new high against the dollar.  Jennifer Hughes at the Financial Times tells us:

"The renminbi this month has been allowed to rise against the dollar at an annualised rate of about 11 per cent, compared with an average 4 per cent this year." 
Hughes makes the accurate point that they're probably not shifting into euros, they're just shifting away from their currency peg.  This is what Geithner, the IMF, and loud economists like Paul Krugman have been pushing China to do.  They still hit a new record trade surplus this month, so they have a long way to go.  BUT, it's a sign that China really is moving to stimulate domestic demand instead of subsidizing exports. 
The reason many economists in the U.S. have been clamoring for this is because the "Bretton Woods II" arrangement where the world lends money to us while we buy their stuff hasn't been real helpful for U.S. manufacturing or our current account balance. (This is outlined in this book here). China rotating away from U.S. Treasuries eventually means higher interest rates.In an ideal world, we would coordinate all this with China. For us, it means a depreciating dollar and potentially more competitive exports and fewer imports from China. But unless the U.S. starts saving more our trade deficit will simply shift from China to some other countries (current account balance is a function of national savings and investment, I explain that here).    

This was brought to my attention today by someone who told me a factory in China they do business with is now requiring payments in RMB instead of USD. That's a good signal that the factory expects more real appreciation.

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