Le Défi Chinois

So far, discussions about whether or not China should revalue its currency have focused almost exclusively on the exchange rate’s impact on China’s trade balance. But, in evaluating China’s currency policy, the effects of any change on the trade balance are no more important than the potential consequences for inward and outward direct investment.

NEW YORK – So far, discussions about whether or not China should revalue its currency, the renminbi, have focused almost exclusively on the impact of the currency’s exchange rate on China’s trade balance. But what would an appreciation of the renminbi do to China’s inward and outward foreign direct investment (FDI)?

In evaluating China’s currency policy, the effects of any change on the trade balance are no more important than the potential consequences for inward FDI, which plays such a crucial role in China’s economic development, and China’s outward FDI, which is receiving increased attention worldwide.

China has been the developing world’s largest recipient of FDI since the mid-1990s. Revaluation of the renminbi would make it more expensive for foreign firms to establish themselves (or expand) in China – the world’s most dynamic market – and would render exports of foreign affiliates, which account for 54% of total exports, less competitive internationally. On the other hand, the increased cost would be offset to some extent by lower-cost imported inputs, and foreign affiliates could expect to repatriate higher profits from sales in China in terms of their own currencies.

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