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Renminbi and Reality

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.

Of course, there are other sources of friction now that did not seem as pressing five years ago. America’s internal and external deficits remain large, and its unemployment rate is both high and rising. Someone needs to take responsibility, and, as US politicians don’t want to blame themselves, the best available scapegoat is China’s exchange rate, which has not appreciated against the US dollar in the past 18 months.