More recently, when Congressional legislation against Chinese currency manipulation emerged as a real threat, China allowed its currency to appreciate against the dollar by a couple of percentage points. Yet the rise in the euro, yen and other currencies compensatedforthefallinthedollar,preservingChina’sadvantage.
China’s dominant position is now endangered by both external and internal factors. The impending global slowdown has intensified protectionist pressures. Countries such as Japan, Korea and Brazil are interveningunilaterallyincurrencymarkets.
If they started imitating China by imposing restrictions on capital transfers, China would lose some of its current advantages. Moreover, global currency markets would be disrupted and theglobaleconomywoulddeteriorate.
Internally, consumption as a percentage of GDP has fallen from an already low 46 per cent in 2000 to 35.6 per cent in 2009, as China expert Michael Pettis has shown. Additional investments in capital goods offer very low returns. Fromnowon,consumptionmustgrowmuchfasterthanGDP.
Thus both internal and external considerations cry out for allowing the renminbi to appreciate. But currency adjustments must be part of an internationally coordinated plantoreduceglobalimbalances.
The imbalances in the US are the mirror image of China. China is threatened by inflation, the US by deflation. At nearly 70 per cent of GDP, consumption in the US is too high. The US needs fiscal stimulus enhancing competitiveness rather than quantitative easing that putsupwardpressureonallcurrenciesotherthantherenminbi.
The US also needs the renminbi to rise in order to reduce the trade deficit and alleviate the burden of accumulated debt. China, in turn, could accept a higher renminbi and a lower overall growth rate as long as the share of consumptionisrisingandtheimprovementinlivingstandardscontinues.