Barry Eichengreen wrote a thorough defence of China’s exchange rate policy response to the global demands for letting the Renminbi appreciate and thus stimulate the reduction of US trade deficit.
US Treasury Department recently launched a series of initiatives which labeled China as a currency manipulator and a true source of America’s widening trade deficit and loss of manufacturing jobs. I pretty much disagree with this particular assertion. China maintains a fixed exchange rate of Renminbi against the US dollar (6.83 RMB/1 USD). True, it is a very difficult empirical task to estimate the true exchange rate of the two currencies due to the fixed exchange rate. If Chinese policymakers let the Renminbi float freely in global currency market, estimating the real exchange rate would be an easier task.
Low exchange rate against the USD stimulated a large surplus of foreign currency reserves and a large trade surplus from a significant export advantage againist foreign exporters. China’s low GDP per capita is pretty much associated with country’s sizeable share of investment in national income. Gradually, as Chinese GDP per capita will grow, the share of investment in GDP will correspondingly decline.
The macroeconomic cost of Renminbi appreciation is a daunting empirical task. Earlier estimates suggest that Chinese annual growth rate might be lower by 1-1.5 percentage point. Renminbi appreciation would also induce Chinese growth pattern shift from investment and export-driven growth to consumption-based growth. It is only a sheer guess whether Chinese policymakers will embrace lower economic growth and a shift towards domestic consumption as the main engine of growth.
However, it would be foolish to mark China as currency manipulator and an ultimate source of US trade deficit and manufacturing loss. The latter can be solely explained by a change in productivity structure which offshored many of America’s jobs and created even more jobs at home. The only feasible means of reducing US trade deficit is to cut a galloping fiscal deficit which, according to Congressional Budget Office (CBO), is likely to exceed 10 percent of the GDP in the medium term. A move to free-floating Renminbi exchange rate would yield substantial benefits for the world economy. However, China did a great job of ignoring Western political demands without any reliance on sound economic analysis.
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