Chinese Vice President (and presidential heir-apparent) Xi Jinping is on a multi-day official visit to the United States this week, and not surprisingly, one of the first issues raised was the US-China trade imbalance. I was quoted in a number of articles, including one in the Los Angeles Times, pointing out that the exchange rate — for all the fanfare that often surrounds it — is not the core issue; market access is:
Indeed, economists say, it would be misguided to treat currency appreciation as a panacea. China is hard-wired for exports, boasting structural advantages such as economies of scale, cheap credit and government subsidies.
“Currency is just part of the equation,” said Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing. “Back in the 1980s, Japan agreed to double the value of the yen but it didn’t have an impact on the trade imbalance because there were structural factors preventing that change.”
(I also made some similar comments to BBC, which you can read here.)
My comments were echoed by a number of US-China trade experts:
“The fundamental challenge facing us is market access,” said James Bacchus, a Washington-based attorney and former Florida congressman and chairman of the appellate body of the World Trade Organization. “The singular focus by the U.S. [on the Chinese currency] has been misplaced.
That’s not to say that China’s currency policy isn’t a concern — I’ve argued for quite some time that China’s intervention to support the peg and keep the RMB from rising fuels inflation and undermines the kind of economic adjustment China needs to make to get on a more sustainable growth path. But it’s only one piece of the puzzle. Those who are interested can read a more complete version of my argument here.
These days, it’s not even clear that the RMB would appreciate, if allowed to float. In recent months, the downturn in Chinese real estate, along with growing fears of a “hard landing,” have apparently caused capital to start flowing out of China — enough to cancel out the upward pressure on the exchange rate from the trade surplus, and force the PBOC to draw down (slightly) on its gargantuan FX reserves to keep the RMB from dropping in value. Some Chinese officials have trumpeted this as evidence that the RMB is in “equilibrium” with the dollar, and that China has achieved “rebalancing.” I would argue the opposite: that China’s failure to rebalance in a more meaningful way is destabilizing its economy, leaving investors looking for a way out. Nevertheless, the outflow of funds on the capital account does complicate efforts to use the exchange rate as a tool for correcting the trade imbalance on the current account.
By the way, for those who are interested in reading more about Xi Jinping, here is another LA Times article by the same reporter, David Pierson, and his colleague Barbara Demick, profiling him. Barbara, you may recall, wrote an excellent book on life in North Korea, which I can’t recommend highly enough.