Why revalue rmb

Gallen, Switzerland. He predicts that the exchange-rate debate is far from over. The principal losers would be U. As for workers in the U. He cites recent research on U. However, this is not the world we live in. In terms of what the Chinese should expect from the revaluation, Wang of CEIBS underscores the importance of looking at it alongside another big change: The rise of Chinese wages. Marshall W. Meyer , Wharton professor of management, agrees that rising wages have a key role to play.

But as both Wang and Meyer note, the government has been in a corner when it comes to wages. It would backfire and many people would lose their jobs. So a mild increase in wages — just a little bit faster than GDP growth — would solve the problem. Some countries will try, [but] to build a manufacturing base and all the infrastructure that you need — transportation, energy, the entire value chain to the final good — takes many years. After all everyone is already doing it — cheating on trade, that is.

The big surplus countries are dragging their feet on enacting the kinds of policies that will increase domestic demand and so reduce the drag on global growth caused by their deficient demand.

The big deficit countries are either in collapse Europe or are warily eyeing the amount of their domestic demand that leaks abroad to create foreign jobs the US.

In a world of beggar-thy-neighbor policies and anemic global demand growth, countries that do not retaliate will almost certainly see rising unemployment. So that is why I think pressure on the renminbi is inexorable. The way the numbers work, I see only three options. First, the US can allow its trade deficit to explode.

Second, the world can organize a concerted attempt to deal with imbalances. Or third, each country can continue implementing policies aimed at acquiring a larger share of dwindling global demand.

The first two, I think, are unlikely, and so I suspect the renminbi issue will not go away. But excessive focus on currencies and tariffs is likely to make a bad situation worse, and this is what I really want to discuss today. Currencies matter to trade, and it is strange to see the gyrations among many economists who try to deny it. Most notable, I think, is the complete reversal of official opinion in Japan. But after the PBoC started intervening against the yen a few months ago, suddenly Japanese officials have decided that in fact currency intervention matters a great deal to trade.

Perhaps to someone more cynical that I am the reversal in Japanese opinion is not so surprising. As Tokyo seems to have discovered, currencies do indeed matter. The level of the currency has a big impact on the relationship between domestic production and consumption, and of course the difference between the two is the savings rate, which determines the trade surplus i.

For that reason I am always puzzled by people who say that devaluing the dollar will have no impact on the US trade deficit because the problem is low savings relative to investment.

No, that is not the problem. That is simply one of the definitions of a current account deficit. But if the dollar devalues, and consumer prices rise, US consumption is likely to decline.

In addition, to the extent that any of the stuff Americans used to import before the devaluation is now produced domestically not all, but any , then US production must rise. Since savings is equal to production minus consumption, the US savings rate must automatically rise. But just because the currency matters to trade, it does not mean that it is the only thing that matters, or even the most important thing that matters. Anything that affects the level of production, the level of consumption, or the level of investment, will automatically affect the trade balance.

This is why I worry that we are putting too much pressure on the renminbi. There are many ways for China to rebalance, and they all involve the same process of transferring income from producers to households. Raising the value of the renminbi, for example, increases the real value of household income in China by reducing the cost of imports. It balances this by lowering the profitability of exporters. But what would happen if China were to raise the currency too quickly? In that case the profitability of the export sector would decline so quickly that exporters would be forced either into bankruptcy or into moving their facilities abroad to lower-wage countries.

Either way, they would have to fire local workers. But firing workers reduces household income and household consumption. If it reduces household income faster than the revaluation increases real household income by lowering import prices , the net result is a reduction in total household income and a reduction in household consumption.

This is the problem China faces. It must raise the value of the renminbi as part of its rebalancing towards greater domestic consumption, but if it does so too quickly, the rebalancing will occur not as an increase in consumption relative to rising production, but rather as a drop in production relative to declining consumption.

This may seem like a confusing point, but it is worth understanding. China can rebalance with high unemployment as well as with low unemployment, and the difference has to do with the speed of the rebalancing. If China adjusts too quickly, consumption will actually decline, and production will decline even faster. In that case China rebalances consumption rises as a share of GDP , but under conditions of rising unemployment. Press release. Full revaluation of the Chinese yuan would increase U.

GDP and employment, reduce the federal budget deficit, and help workers in China and other Asian countries. For the past several years, the best economic research has shown that China needs to increase the value of its currency, the yuan, against the U.

Since then, the yuan has inched up at a glacial pace, rising only 5. While appearing to let the yuan float, China has actually increased its currency intervention by amassing record amounts of foreign exchange reserves to prevent meaningful appreciation of the yuan.