Is the US the appropriate renminbi critic?

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Free Exchange has observed over the past few days that the blogosphere, financial press, and political punditry have put forth a plethora of opinions about Chinese economic policy. Let's take a look at some of the latest:

Bill Owens argues for closer cooperation in just about everything:

The US-China relationship is a vital interest for the two countries and the world. Throughout history, great powers have tended to become adversaries. Now, for a few years, we have a chance to break that cycle. It will take strong and enduring commitment on both sides. But a new and engaging relationship is imperative for our common good

Martin Wolf puts wishful words into the mouth of Barack Obama:

At a time of such weak global demand, yours is a 'beggar thy neighbor' policy. You complain about the protectionist actions I have implemented. But their impact will be trivial compared with China's 'exchange rate protectionism'. This policy will shift the costs of adjustment on to China's trading partners.

Paul Krugman offers even tougher talk:

What makes China’s currency policy especially problematic is the depressed state of the world economy. Cheap money and fiscal stimulus seem to have averted a second Great Depression. But policy makers haven’t been able to generate enough spending, public or private, to make progress against mass unemployment. And China’s weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters.

Barack Obama has even joined the chorus, telling reporters, "I was pleased to note the Chinese commitment made in past statements to move toward a more market-oriented exchange rate over time".

The Economist asks the obvious, namely, what is China thinking? If China's currency policy is putting the world economy on a collision course with itself via beggar thy neighbor trade agendas and aggravated imbalances, why persist in holding down the renminbi?

There are two reasons. First, renminbi depreciation isn't especially severe when looked over a broader time frame. Second, renminbi appreciation will do little to fix the trade balance between China and America, as the US in unlikely to begin producing much of what it imports from China. Instead, it may lead to inflation:

If a stronger exchange rate is in China’s own interest, why does it resist? Beijing rejects the accusation that its exchange-rate policy has given it an unfair advantage. It is true that other emerging-market currencies have risen sharply this year, but this ignores the full picture. Last year China held its currency steady against the dollar throughout the global financial crisis, while others tumbled. Since the start of 2008, the yuan has actually risen against every currency except the yen.

Some Chinese economists warn that the benefits to America from yuan revaluation are much exaggerated. In particular, a stronger yuan would not significantly reduce America’s trade deficit. There is little overlap between American and Chinese production, so American goods cannot replace Chinese imports. Instead, consumers would simply end up paying more for imports either from China or other producers, such as Vietnam. This would be like imposing a tax on American consumers.

If Martin Wolf is correct, and China's 'exchange rate protectionism' will shift the cost of adjustment to China's trading partners, I'm surprised these partners aren't putting more pressure on China to depreciate. In some ways, the US lacks credibility in pushing China towards a stronger renminbi. For one thing, America is experiencing first hand the benefits of a weaker currency, as evidenced by its reduced trade deficit. Why shouldn't China be able to enjoy similar benefits? Furthermore, China's weak renminbi policy is made possible though the purchase of dollars (in the form of US treasuries), which allows America to deficit-spend its way towards a recovery.

Meanwhile, as emerging markets such as India, Brazil, and Russia face an uphill battle in limiting the appreciation of their own currencies, they are likely to grow frustrated with their lost competitiveness. Unlike America, which sees China as its primary creditor, these countries might have more wiggle room in their relationships with Beijing, allowing greater opportunity for criticism. Instead of putting pressure on foreign capital inflows, might they point a finger or two towards the renminbi?

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