What China's Currency Shift Could Mean

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In The Media

What China's Currency Shift Could Mean

Chinese production continues to rise faster than domestic consumption, and even if China allows the renminbi to appreciate against the dollar, a rising trade surplus could lead to another increase in tensions.

By Michael Pettis

Published on Apr 8, 2010

Source: The New York Times

What China's Currency Shift Could MeanThe renminbi is only one of many variables that affect U.S. and global trade. even within China. China’s huge trade surplus is a consequence of a number of policies that shifts income from consumers to producers, and in so doing cause Chinese production to rise much faster than China’s ability to consume what it produces.

If the renminbi appreciates while real interest rates decline, as currently seems to be happening, the positive impact of a rising renminbi can be more than easily offset by the lower cost of capital for manufacturers. In this case we could easily see a rising renminbi coincide with a rising trade surplus, much as we saw from July 2005 onwards, when a rising renminbi and declining real interest rates, along with a vibrant U.S. consumer financing market, saw a surge in China’s trade surplus.

The recent thaw in trade tensions is likely to be very temporary. Ultimately what drives trade conflict is when the trade surplus country cannot adjust quickly, while high unemployment in the trade deficit country creates impatience for rapid change. China needs several years to make what will be a difficult adjustment toward a more balanced economy, but with high unemployment in the U.S. likely to persist for several more years, it is not clear that the U.S. will be willing to wait.

About the Author

Michael Pettis

Nonresident Senior Fellow, Carnegie China

Michael Pettis is a nonresident senior fellow at the Carnegie Endowment for International Peace. An expert on China’s economy, Pettis is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.

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Carnegie India does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

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