In one of the economics essay I’ve written for A Levels Practice, I argued that the appreciation of Yuan is unlikely to solve the trade surplus problem that they have and thus reality will not play out as the Americans choose to believe – trade imbalance will continue to mount and China may risk deflation, following the fate of Japan in the past. I was very lucky because during A Levels a somewhat similar question came out and I made the same sort of argument with points already in my mind.
Most journals and publications I read insist on the need for Yuan to be revalued, giving little credit for the fact that China already allowed it to appreciate against the dollar substantially compared to the past. Without the unpegging of Yuan to the Dollar in 2005, trade imbalance could have been worst. That doesn’t mean that it was the appreciation of Yuan that naturally lend its hand at achieving balance; it was mainly the gradual appreciation and the timing it was allowed to appreciate. The Economist analysed China’s side of the Yuan policy. It gives a balanced account of how political forces and potential economic problems makes China hesitant about revaluing its Yuan.
It is unfair that America always seem to put China into bad light by hinting that China could make a difference (since its central government wield a whole lot of power) but don’t want to. The fact is that there are way too many instances where Americans had the power too, but then they’d exclaim that all sorts of lobbying and market forces are in the way. If China were to give in to this sort of pressure, it would make them way too weak. Besides, America isn’t always right (in fact, most of the time it isn’t); China has done too well in their transition from central planning to market economy so far and will continue to create their own path.
The Becker-Posner Blog also features Becker and Posner’s individual views on the need for China to revalue the Yuan and when so.
Appreciation of yuan is definitely not the silver bullet that US requires to solve this problem and it is evident that China is being inveigled. In this line of argument, such dogmatic approach seems to be pontificating the importance of China’s domestic demand but we need to understand that their demand is so little that they need to grow by having a large trade surplus! only then China is capable of lifting the nation (or world?) out of this fiscal bubble everyone is trying to portray.
until then, let’s keep this mire of contentious foreign affairs undercover and await the glorious rise of China…
Well, the domestic demand of China is probably important and growing by a large surplus is fine but unlikely to help lift the world’s economy. Unfortunately, it’s not so easy to manipulate the consumer demand (as opposed to government expenditures) and thus appreciation of yuan directly and suddenly would have little good effect on China’s economy. The cultural change that will lift domestic demand will eventually come but not to soon – meanwhile we can only wait for the imbalances to correct gradually.