China's manipulated devaluation of currency has been subject to much attention, even prompting President Obama to call for a float at the UN. "Experts" believe that the renminbi "is artificially weakened by 20 to 25 percent." Wen Jiabao, including other government officials involved with China's finance ministry, has been avoiding this complaint directly. Let's ask ourselves some basic questions concerning this situation:
1) Why do it? Why devalue the currency?
For starters, they would hope to maintain a long-term trade surplus by doing so. Second, they would probably want to knock their competitors out of the box. Vietnam and other South East Asian countries are capable of producing/manufacturing products that the Chinese export, at an even cheaper price (quality about the same - good; ceteris paribus, just for sake of argument).
2) What are the ramifications of the devaluation of the renminbi?
A constant, lower standard of living. Suppressing the wage of China's massive labor force, that is - they want to keep a cheap, domestic labor force in order to stay #1. The villagers will remain villagers, while the business elite and aristocrats in the cities exploit them collectively (but mostly not consciously, nor intentionally) - this is capitalism. This is not true nationalism, but perhaps, this is how progress is made, at least in the pragmatic sense. This, I believe, is having a negative effect on not just China's domestic population, but the countries who have potential to gain from specialization, emerging countries/markets, fellow developed markets/nations, and etc. This is not to say that there are perhaps positive effects, in terms of international investment - China's interest in Africa and Europe need to be noted. But to what end - short term and long term?
and 3) a bonus question - who are China's friends?
China's ties with US weaken. It makes sense from their point of view that they would view America as loaded with debt. We have indeed unconsciously eaten the words "Too Big to Fail", but when China is in a bind in the future, despite its A-list of importers (Japan - who they are still disputing with over the past World War - South Korea, Taiwan, US, Germany, being the top 5), who will help China? As an economist-in-the-making, I am susceptible to being concerned with social prosperity. Truly wonderful nations have souls. Their legacy means nothing if their people do not have a nation they can live with, consciously support, and in times like these, believe in. Next year, if I am able to make it to Shanghai, I shall try to find new perspective and understand how social prosperity may best be formed there, and probably long-term economic prosperity as well.
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additional article (op-ed) that contrasts China and US, also lightly making note of the first's modern "5-year plan"
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Hey Mister,
ReplyDeleteGood to think about a currency devaluation and the social impacts of such a horrible act. But I tend to think that labour, as many other prices in the economy, follows an international equilibrium. China is already paying a huge price with sucessive defict on its accounts (that they can balance with their international reserves). However, when the China bubble burst and things get worse, no one will ever want to see the tremendous disaster!