Steady on the Renminbi

NEW HAVEN – Currency wars are raging worldwide, and China is bearing the brunt of them. The renminbi has appreciated sharply over the past several years, exports are sagging, and the risk of deflation is growing. Under these circumstances, many suggest that a reversal in Chinese currency policy to weaken the renminbi is the most logical course. That would be a serious mistake.

In fact, as China pursues structural reforms aimed at ensuring its continued development, forced depreciation is about the last thing it needs. It would also be highly problematic for the global economy.

On the surface, the situation certainly appears worrisome – especially when viewed through the currency lens, which captures shifts in Chinese prices relative to those in the rest of the world. According to the Bank for International Settlements (BIS), China's real effective exchange rate – an inflation-adjusted trade-weighted average of the renminbi's value relative to the currencies of a cross-section of China's trading partners – has increased by 26% over the last four years.

China's currency has appreciated more than any of the other 60 countries that the BIS covers (apart from dysfunctional Venezuela, where the figures are distorted by multiple foreign-exchange regimes). By comparison, the allegedly strong US dollar is up just 12% in real terms over the same period. Meanwhile, China's emerging-market counterparts have experienced sharp currency depreciations, with the Brazilian real falling by 16%, the Russia ruble by 32%, and the Indian rupee by 12%.