Renminbi and Reality

The renminbi's exchange rate has once again become a target of the US Congress, but revaluation by China would only push up US inflation, as Vietnamese, Indian, and other low-cost producers fill the export gap. Only serious efforts by both sides to fix their domestic fundamentals, including over-consumption in the US, will imbalances be reduced in a sustained way.

BEIJING – The exchange rate of the renminbi has once again become a target of the United States Congress. China-bashing, it seems, is back in fashion in America.

But this round of China-bashing appears stranger than the last one. When Congress pressed China for a large currency revaluation in 2004-2005, China’s current-account surplus was rising at an accelerating pace. This time, China’s current-account surplus has been shrinking significantly, owing to the global recession caused by the collapse of the US financial bubble. China’s total annual surplus (excluding Hong Kong) now stands at $200 billion, down by roughly one-third from 2008. In GDP terms, it fell even more, because GDP grew by 8.7% in 2008.

Back then, pegging the renminbi to the dollar pushed down China’s real effective exchange rate, because the dollar was losing value against other currencies, such as the euro, sterling, and yen. But this time, with the dollar appreciating against other major currencies in recent months, the relatively fixed rate between the dollar and the renminbi has caused China’s currency to strengthen in terms of its real effective rate.

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