China’s renminbi may add to us problems

China’s renminbi may add to us problems
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First Published: Tue, Apr 15 2008. 12 20 AM IST
Updated: Tue, Apr 15 2008. 12 20 AM IST
The Pythagoreans of classical Greece thought the number seven reflected a perfect balance. The renminbi has crossed the threshold of seven to the dollar, but neither the Chinese nor the US authorities are likely to agree with the ancient philosophers that it has attained an ideal state.
True, in letting the currency rise faster — 4.5% in the last three months, compared with 7% in all of 2007—the Chinese are doing what both they and the Americans say they want. The more expensive Chinese currency, the renminbi, should help reduce the huge Chinese trade surplus with the US, which totalled $237 billion (Rs9.45 trillion) in 2007, and may help to quiet restive US politicians before the Beijing Olympics in August.
But the rise in the renminbi is not simply either a sign of Chinese economic progress or a geopolitical gambit. It is also a recognition that the long-standing policy of keeping the currency cheap is no longer working.
For years, the fixed and then slowly rising renminbi-dollar exchange allowed Chinese manufacturers to thrive. Competitive export industries created jobs for many of the hundreds of millions of displaced peasants and permitted the rapid development of an industrial infrastructure.
But as China got richer, the currency became increasingly undervalued. That made it harder for the Chinese authorities to keep the renminbi from rising against the greenback. China has issued vast amounts of local currency to buy exporters’ dollars. Those new renminbi are now bidding up general prices. Inflation in China is running at 9%.
The Chinese authorities are in a dilemma. Uncontrolled inflation could provoke social unrest. A steep currency revaluation might push down inflation by cutting import prices and excess money supply, but it might also push up unemployment to socially disruptive levels.
The US has a corresponding predicament. Not only would a rapid renminbi revaluation add to already significant inflationary pressures, but it might have other undesirable effects, such as encouraging other dollar-linked countries to revalue their currencies or pushing up yields on dollar-denominated debt.
In Pythagorean lore, the number seven expressed the harmony of the spheres. The renminbi’s seven looks more like a sign of future discord.
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First Published: Tue, Apr 15 2008. 12 20 AM IST