Multilateralism Won't Get China to Move on the RMB

Includes: CNY, CYB
by: Firat Ünlü

Frustrated by a China still insistent on its dollar peg, some sections within the US have now come up with the proposition that instead of trying to persuade China to rise the value of the RMB via unilateral talks the time has come to pay them a visit with some friends. It is argued that through multilateral talks leverage can be enhanced and China pressured to finally make a move on its currency. International fora are increasingly used to solve global problems so ample opportunities exist to have a chat with Mr. Hu Jintao.

Unfortunately for the US administration it may find itself with little company.

Click to enlargeChina has been closely pegging the RMB to the dollar since July 2008. It is thus common to see the argument that this has been done in order to boost exports.

The problem however is that by pegging the RMB to the dollar China has in fact been losing competitiveness from a perspective that solely revolves around exchange-rates. Looking up the exchange-rates of the G20 and major players in the East Asian region, the only nation with a credible rise in the value of its currency since July 2008 is Japan.

Granted, China’s peg may be structurally undervalued, but that is an argument which will be refuted by the Chinese side. They will simply point out to the stability that this has brought to their economy and the international system and instead point out to several major countries whose currencies have fallen dramatically in value.

Click to enlargeThe multilateral option seems thus off the table, how could the UK credibly ask China for a revaluation upwards when the pound itself has literally been pounded?

China knows that every country is the world is trying to export its way out of the recession, with a strong focus on domestic issues it will take a credible multilateral alliance to get China moving. However China will be making moves on the RMB based on domestic factors soon.

An underappreciated aspect of Chinese foreign policy is to buy time. With their own stimulus programme creating enhanced infrastructure in its underdeveloped Western part China will in the future use a crawling-peg to incentivize its manufacturers to move there. A rising RMB is offset by lower costs in that region, with transport in place it would make sense for many to move within China as relocation to a different country comes with uncertainty.

Disclosure: No positions