In a post several days ago (see Yuan Revaluation, Euro Weakness, and the US Recovery), I suggested that while I believe that the yuan ought to be revalued vis-a-vis the dollar, the crisis in Europe would likely put any such plans on hold. I wrote,
…although I agree that China needs to address the yuan-dollar peg, a gradual revaluation to competitive levels is probably the best outcome for the global economy. A sudden rise in the value of the yuan could come with painful near-term adjustments that derail the currently fragile global recovery.
But that said, there’s now an additional complicating factor: With the euro depreciating against both the dollar and the yuan, any plans that Chinese policymakers may have had to revalue the yuan against the dollar are likely to be put on hold…
Sure enough, there seems to be some chatter emanating from China that its policymakers are considering delaying a revaluation (see Yuan Revaluation Could Be Postponed, ht BA). According to the People’s Daily:
Worried about a depleting trade surplus and a possible slowdown of its economy later this year, China is not likely to accelerate pace to revalue its currency, the yuan, experts revealed.
The Beijing-based China Daily reported Wednesday that the chances of an early revaluation of the renminbi look unlikely and could happen much later than expected, considering that the nation’s trade surplus may see steep erosions due to the European debt crisis and the growing trade protectionist measures against China.
Interestingly, and quite compellingly, Michael Pettis argues that this is exactly the wrong response (see Don’t Misread the Euro Crisis). Instead, he argues that now is precisely the time for China to change its trade policy.
The Greek crisis, rather than reduce the urgency for China to revalue its currency and adjust its trade policy, may on the contrary require that China react much more aggressively than originally planned. Why? Because any sharp adjustment in trade or capital flows in one part of the world must automatically force a series of equally sharp adjustments elsewhere…
This need to balance implies that the problems in Europe are going to make international trade relations, and especially those between China and its largest trading partners, much tenser. In fact I worry that the sudden and unpredicted speed of the European adjustment will force a resolution of the global imbalances at a far faster pace than I, already pessimistic, was expecting.
…is there anything that China can do to head off conflict? Yes. It can buy euros, the more the better – just lift every offer out there. By strengthening the euro, or at least limiting its weakness, this strategy will force the brunt of the adjustment back onto European surplus countries rather than onto the US and, via the US, back onto China. Sarkozy and other European leaders might not be very happy, of course, but they will be at least partially mollified by the net capital inflows and the reduced humiliation of a collapsing euro.
Interesting. Definitely some food for thought. And I encourage you to read his post in its entirety. But still, I can’t help but wonder whether the political will is there to follow through on such a strategy. My hunch is that policymakers will resist change until forced…