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Asia-PacificOctober 5 2003

Why China should not float

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Americans who are pushing for a renminbi flotation should remember it will bring rising prices and higher national debt costs.

In France, when people are upset, they take to the streets. In Brazil, they dar um jeito (find a way round the system). In the US, they holler.

Right now the US is hollering about China’s currency. The weakening of the renminbi (or is it the strength of the dollar?) is flooding the US market with cheap imports, throwing Americans out of work and worsening the current account deficit.

Blaming China for America’s woes is nonsense, of course. Leave aside for a moment the economists’ debate about whether to fix or float a currency. The idea that Americans, whose wages are vastly higher than those of the Chinese, are going to regain manufacturing jobs if China revalues the renminbi is fanciful. More than half of China’s exports are produced by multinationals, many originating from the US, which would never repatriate operations – whatever the value of the renminbi.

There are other reasons why China should resist US pressure to float the currency. China has achieved economic success by taking a gradualist approach to reform and preserving stability. It still needs to do this in the face of high levels of non-performing loans, creaking state-owned enterprises badly in need of an overhaul and rising levels of rural-to-urban migration. Shocks to the system from over-hasty liberalisation of the exchange rate and the capital account could be the straw that breaks the camel’s back.

The other factor not considered by those who complain is that China’s economy is much more open than popularly believed. Imports account for 23% of GDP, giving China a higher import ratio than either the US or Japan. Add the domestically sold output of foreign companies and the figure rises to 40% of GDP.

In any case, the trade surplus itself is not huge (some $15bn) and although China runs a surplus with the US, it runs a deficit with many Asian neighbours and emerging market giants, such as India and Brazil. Carefully handled, China is tomorrow’s growth engine for the world, which is so badly needed.

Deputy governor of the People’s Bank of China Li Ruogu pointed out at last month’s IMF/World Bank annual meetings that US consumers would pay considerably more for their goods if Chinese imports were curtailed, and that much of the surplus is then recycled into US treasury bonds.

Rising prices and higher national debt costs: are they what those that holler had in mind? Better shut up then.

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Read more about:  Analysis & opinion , Asia-Pacific , China