July 29, 2005
There is less here than meets the eye -- unless there is more. That’s the considered reaction of the experts to the recent decision of the Chinese authorities to allow the renminbi to increase in value by 2.1% and fluctuate 0.3% daily, and to switch from a dollar yardstick to a basket of currencies.
There seems to be
general agreement that the revaluation will not do much to reduce our trade
deficit with China. Some Chinese manufacturers will absorb the increased
costliness of their currency by lowering margins rather than by raising
prices. Others, especially manufacturers of electronic products, are raising
prices a bit, according to importers with whom I have spoken. To the extent
that those price increases make Chinese companies marginally less
competitive, the business they lose will go to other Asian producers, rather
than trigger a revival in America’s electronic, apparel and other
Whether there is more or less
here than meets the eye will depend less on what the Chinese have done than
on what they do next. Treasury Secretary John Snow hailed the Chinese for
moving to market-based exchange rates. Which, of course, they have
explicitly refused to do -- to the applause of Joseph Stigler and other
economists who say that stability of the renminbi is important to China’s
ability to continue its rapid (9.5% annual) economic growth, and to the
prosperity of the Asia-Pacific region.
Just as the
currency speculators were getting ready for a saunter down that one-way
street, the PBOC in a “solemn declaration” declared, “This certainly
does not mean that the 2 percent readjustment of the renminbi is a first
step that will be followed by further adjustments.”
The markets seem to be deciding that the solemnity of the declaration is questionable. Fourteen leading foreign-exchange dealers, surveyed by Dow Jones Newswires for The Wall Street Journal, are expecting a further upward revaluation of 6%, bringing the total increase in the value of the renminbi against the dollar to a bit more than 8%. At this writing, trading in one-year contracts shows that the market is predicting a further 4.6% revaluation, bringing the total to 6.7%.
Both figures fall short of what Washington’s politicians are telling the
Chinese they must do to defuse pressure for protectionist measures. The
Treasury initially said that it was hoping for a 10% revaluation, but then
retreated in fear of offending the Chinese, a fear that seems to dominate
the administration’s China policy, at least in the area of finance.
China’s leading critic in congress, Senator Chuck Schumer, says he expects
further (unspecified) revaluations, and will be “carefully monitoring this
process over the next few months.” Some economists are telling him that it
will take a revaluation of 40% to have a significant effect
on America’s trade deficit. That is not in the cards.
My own guess is that no revaluation that is acceptable to the Chinese will cool the rhetoric of its critics. For the next few months Schumer and colleagues will be absorbed with their fight to prevent President Bush’s Supreme Court nominee, John Roberts, from being confirmed by the Senate -- at least not without a reputation-damaging fight. After that, continued massive trade deficits will again attract the attention of the protectionists, who will find allies among conservative Republicans who worry about Chinese threats to Taiwan, its one-child-only abortion-inducing policy, its efforts to lock up oil supplies, and its stated intention of replacing the US as the dominant military/economic power in the Asia-Pacific region.
that the revaluation would prompt Asia’s central banks to dump their vast
hoard of dollars have not materialized. Most of these banks had already
diversified their currency holdings about as much as they consider prudent
even before China’s revaluation.
Nor have fears of a negative
impact on US share prices proved well-founded. Many analysts feared that the
Chinese move would trigger a spurt in interest rates, with devastating effect
on the interest-rate-sensitive capital goods and housing industries, and on
share prices. In the event, orders for capital goods are rising, new home
sales have hit another record, and stock markets have shrugged. All in all,
says the Fed in it is latest report, economic activity in all twelve Federal
Reserve Districts “continued to expand in June and early July... [and] labor
markets generally continued to improve.” It is early days yet,
but it seems unlikely that the minor change in the value of the renminbi will
abort that expansion.
is more likely to come from major policy errors, such as an inability to get
the structural federal deficit under control. A profligate congress is handing
an even more spendthrift president an energy bill laden with goodies for
everyone from corn growers -- mandates for more ethanol in gasoline -- to the
nuclear industry. The fact that nothing in the bill will reduce oil imports is
irrelevant to politicians eager to please their various constituencies.