The Other Side of the Coin
Sorry, couldn't resist the facetious title. But there's an extremely interesting counter-argument to all the 'revalue the yuan' talk.
Be careful what you wish for | Economist.com
Even if the Chinese central bank does, as some expect, let the yuan strengthen more than previously anticipated, this will not be the panacea that many hope for. As Tyler Cowen, an economics professor at George Mason University, points out, China imports many of the components it assembles into finished products; a strengthening yuan will make these components cheaper, eroding some of the effect on export prices. Nor is China’s competitive advantage limited to a cheap currency. And although China is one of the big funders of America’s current-account deficit, it is certainly not alone. Unless Americans curb their appetite for imports bought with borrowed money—and start making more things other countries want to buy—the deficit will continue to be a problem. This is roughly what the Chinese government has been saying.
A rising yuan will have some negative effects on the West, not limited to a shortage of cheap electronics. Cheap Chinese imports have kept a lid on inflation in many countries, letting central banks keep interest rates low without worrying about their economies overheating. As Mervyn King, the governor of the Bank of England, has warned, once the yuan begins to strengthen, central banks will face higher inflationary pressures. With oil prices already pushing inflation to worrying levels, Mr Paulson may not be as eager as he seems for a rising yuan.
