OUTLOOK: Living in Exciting Times as China Mulls Currency Realignment
Warner, Jeremy, The Independent (London, England)
IN HIS bi-annual testimony to Congress over the past two days, Alan Greenspan, chairman of the US Federal Reserve, suggested it would be a good idea for the Chinese to float their currency, the renminbi, or at least revalue it upwards against the US dollar. For China this would amount to a complete reversal in a key tenet of economic policy, with possibly far reaching consequences not just for China and America, but for Europe too. Is there any chance of it happening?
In recent years China has replaced Japan as the country with which the US has its biggest trade imbalance. The deficit is already massive and it seems to grow bigger by the day. While Chinese imports have been broadly tracking the growth in exports, most of the imports come from Japan and the Far East, whereas most of the exports go to America.
As things stand the renminbi is pegged against the dollar and therefore moves up and down with the fortunes of the greenback. If it were floated it ought to rise strongly against the dollar until the trade imbalance is corrected. With America's trade deficit ballooning, the renminbi peg is a growing source of complaint among US policymakers. Memories are short, for the Clinton Administration had much to thank China for when the People's Republic refused to be drawn into the competitive devaluations which marked the Far Eastern economic crisis of the mid to late 1990s. If China had devalued then, it would have made an already serious trade imbalance a great deal worse.
Still, times change and according to Jonathan Story, Professor of International Political Economy at Insead and the author of a recently published book, China: The Race to Market, Mr Greenspan is absolutely right to be raising the issue anew. The trade imbalance is obviously damaging to the US, but it may also be doing China harm, and perhaps tangentially, Europe too.
In order to maintain the exchange rate at its present artificially depressed rate against the dollar, the People's Bank of China has been selling yuans and buying dollars, thereby accumulating huge quantities dollar reserves. …