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A look at the disconnect between real and nominal exchange rates for the yuan-dollar pair points...

A look at the disconnect between real and nominal exchange rates for the yuan-dollar pair points at the source for China's inflation: printing yuan and buying dollars. Maybe Bernanke's right - renminbi revaluation could solve problems for China as well as the U.S.
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Comments (2)
  • mikeybronx
    , contributor
    Comments (382) | Send Message
     
    speaking of China, should it not be the G21 monetary talks?
    19 Feb 2011, 10:26 AM Reply Like
  • bob adamson
    , contributor
    Comments (4562) | Send Message
     
    The assertion that “renminbi revaluation could solve problems for China as well as the U.S” has a sound foundation over time. That said, the transition problems for China entailed in a rapid upward revaluation of the renminbi exchange rate of 35% or more (for such an increase of this extent against the USD would be needed to achieve to any real extent the benefits for the US and China assumed in the assertion) are considerable and are often not appreciated by those postulating revaluation as a solution to problems.

     

    There is great regional disparity in economic modernization and development currently in China and, in the high growth areas along the seaboard, great reliance remains on export of low cost goods. In the immediate aftershock of the global economic meltdown in 2007/8 approximately 32, 000, 000 workers in these coastal areas lost their jobs and it was only massive Chinese fiscal stimulus and monetary easing coupled with partial recovery of the global economy that allowed for the recovery of the Chinese job market. The Chinese Government cannot allow such an employment crisis to reoccur as this would be socially, economically and politically destabilizing throughout the country as masses of unemployed workers stream back to their families in interior China where there are even fewer job prospects. Already the Chinese speak of the ‘ant tribe’ (i.e. masses of newly graduated young people who can’t find jobs). Thus, while maintaining a low renminbi exchange rate imports inflationary pressures, raising that rate significantly in a matter of months would compound significantly an employment problem.

     

    Also, assuming that inflationary pressures in China arise essentially because of the low renminbi exchange rate does not adequately take account of the current bottlenecks in that economy arising from
    (a) the overreliance in coastal China on consumer export industries,
    (b) overbuilding in much of coastal China of office, factory and housing that does not have a ready current market where it is located at current prices,
    (c) the underdevelopment of the economy in much of interior China, and
    (d) the remaining lack of adequate infrastructure in many places.
    Thus, simply increasing the exchange rate for the renminbi, while it would make imports less expensive and cool some domestic inflation, would not remove all the causes of domestic inflationary pressures; especially as the Government would feel compelled to take other measures to maintain high employment and thereby avoid social and political unrest and continue the pace of development throughout China.

     

    In short, the Chinese Government will allow some steady renminbi exchange rate increase (as this is in the long term interests of China domestically and in its foreigh relations with the EU and US etc.) but this rate of increase will be restrained to avoid the transition difficulties discussed above.
    19 Feb 2011, 02:17 PM Reply Like
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