Via Mark Thoma, this week's Economist has a piece arguing that China's recent commitment to redressing income inequality will make it easier for them to revalue their currency: China contemplates change. On China's resistance to large revaluation of its currency:
This is not the first time the Chinese have stood their ground. In the late 1990s, many saw the yuan as overvalued. But China resisted pressure to devalue in order to avoid exacerbating the Asian financial crisis. It is also worth noting that while China does benefit in some ways from an undervalued currency now, it has opened its markets to a greater extent than some other Asian countries during rapid, export-led development.
And on China's growth model and steps to address inequality (see my previous posts):
...China’s leaders may finally be readying themselves for a change in the mercantilist, growth-at-any-cost model that has prevailed for decades. The Communist Party leaders’ annual meeting on economic policy ended on Tuesday with word of a strategic shift: from now on, there will be more emphasis on redressing the inequality and social disruption that market reforms have left in their wake.
The most immediate worry for China’s leaders is social unrest. Last year, the government documented more than 70,000 demonstrations, attended by some 3m protesters. The government is caught in a bind. It needs the export sector to continue booming, in order to absorb surplus labour from the countryside and moribund state-owned companies. But it is aware that the rapid growth of recent years has opened fractures that could grow even wider.
If China can heal some of those rifts with a greater focus on rescuing those left behind by the new prosperity, this may in turn take some of the pressure off the government to subsidise export workers through currency management. It may also help China to develop domestic demand that can take up the slack when America’s appetite for cheap goods falters, as it inevitably must given the paucity of its national savings.
But though details are sketchy, it seems improbable that China’s move towards more balanced economic growth will be anything like the kind of radical leap that foreign observers would like. There are some brands of wealth redistribution that would make foreign investors very jittery, such as higher taxes. Hu Jintao, China’s president, is still consolidating power; even if he had a radical vision of a China less dependent on the cravings of the American consumer, it would have to wait until his command of the party was firmer. More importantly, it would have to wait until Chinese consumers became sufficiently confident in the social safety-net and the provision of affordable health care and education that they were willing to save less and spend more. But where is the money for pensions and the like going to come from?
And though the rising tide of China’s economy undoubtedly has the power to lift all boats, there are worrying rigidities in the system, caused by the under-development of its financial system and the fact that economic reform has not been accompanied by political reform. Officials rightly fret that further economic changes could undermine the stability of the party’s rule. Amid all the talk of addressing the wealth gap, the party’s plenum reiterated a commitment to rapid growth by restating a goal of raising China’s GDP to double its 2000 level by 2010. As long as China’s expansion remains export-driven, western politicians may just have to learn to live with a new and unpredictable economic power.
I think this is an important topic and the American-China economic relationship is very interesting in these days. One major point is for example how the new fed director will narrate the American account deficit; a lack of thrift or unfair Chinese currency management ... The most important point in the Economist article in my opinion is the following point:
"The government is caught in a bind. It needs the export sector to continue booming, in order to absorb surplus labour from the countryside and moribund state-owned companies (...) It may also help China to develop domestic demand that can take up the slack when America’s appetite for cheap goods falters, as it inevitably must given the paucity of its national savings."
The dynamics of American comsumption is a key factor in this topic and with inflation creeping up, rates on the rise and a house slump in the near future Chinese reforms may be well needed.
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