The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Paul Krugman and Gordon G. Chang on the Renminbi


Earlier this week, I wrote a column for on the future of the Chinese economy. The basic premise was that rising labor unrest were bringing the vulnerability of China’s state-dominated economy to the surface, and I implied that the Chinese central bank’s decision to allow the renminbi to appreciate (slightly) might serve the interests of long-suffering Chinese consumers.

But Paul Krugman and Gordon G. Chang are making me wonder if I was overoptimistic. Both of them forcefully argue that the Chinese government is using this modest move to deflect international pressure for a real re-balancing of the Chinese economy. Krugman offers a very lucid account of what’s going on:


China’s exchange-rate policy is neither complicated nor unprecedented, except for its sheer scale. It’s a classic example of a government keeping the foreign-currency value of its money artificially low by selling its own currency and buying foreign currency. This policy is especially effective in China’s case because there are legal restrictions on the movement of funds both into and out of the country, allowing government intervention to dominate the currency market.

And the proof that China is, in fact, keeping the value of its currency, the renminbi, artificially low is precisely the fact that the central bank is accumulating so many dollars, euros and other foreign assets — more than $2 trillion worth so far. There have been all sorts of calculations purporting to show that the renminbi isn’t really undervalued, or at least not by much. But if the renminbi isn’t deeply undervalued, why has China had to buy around $1 billion a day of foreign currency to keep it from rising?

This policy strengthens the hands of politically favored firms at the expense of the vast majority of Chinese workers:

The undervalued renminbi is good for politically influential export companies. But these companies hoard cash rather than passing on the benefits to their workers, hence the recent wave of strikes. Meanwhile, the weak renminbi creates inflationary pressures and diverts a huge fraction of China’s national income into the purchase of foreign assets with a very low rate of return.

One gets the impression that the Chinese government will stick with this approach for as long as they can. I’d add a cautionary note: I tend to doubt that a stronger renminbi would dramatically improve the prospects for job growth in the United States. But it would be a good thing for any number of other reasons, among them that it would improve the quality of life for hundreds of millions of Chinese workers. 


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