Wednesday, June 22, 2005

RENMINBI WATCH


All eyes and ears will be tuned to tomorrow's Senate Finance Committee hearing on U.S.-China economic relations.

Get your rattlin' sabers ready!

Here is te docket of witnesses:

1. Maestro G-span
2. Secretary Snow Job
3. Ken Rogoff
4. Soybean Lobby
5. Intel Corporation
6. NAM representative

What to expect them to say:
1. China needs more flexibility, soon, especially cause by buying all our bonds to keep the renminbi undervalued they're keeping me from pushing up long term interest rates.
2. If China doesn't revalue by 10 percent and pretty darn fast or they'll be sorry.
3. China's rigid exchange rate mechanism, though it may have served a purpose in the past, is begging for a financial crisis, and by the way, would it kill them to have a little Central Bank independence.
4. We'd like to sell more soybeans to China, or better yet, establish crush operations (the production of soy bean meal and soy bean oil) there, and if the currency were to appreciate, the Chinese could buy more of our beans. And can you make sure China doesn't block our genetically modified crops or illegaly reproduce seeds in violation of TRIPs?
5. China's booming economy is creating a vast new market for our chips, and some day soon we hope to design and produce chips there, making China a major export platform for vertically integrated information technology production. We'd like an undervalued renminbi so that we can continue to earn overvalued dollars for our exports from China while paying wages (albeit high-skilled wages) in undervalued yuan. So let's not do anything drastic.
6. Stop dicking around, our vitally important manufacturing sector is dangling by a thread while the Business Roundtable fiddles and Bush dances and watches it burn.

UPDATE: I should be more clear. There are two issues at question here. The first is the level of the Dollar-Renminbi exchange rate. The second is China's choice of exchange rate regime.

What is the difference? The exchange rate is the actual price at which one currency exchanges for another (currently $1 exchanges for 8.28 yuan). The exchange rate is an outcome of market forces--the interplay of supply and demand for one currency relative to other currencies and assets. Outcomes in this market are of course affected by the structure of the market and rules, norms, and customs that underpin market exchange. This configuration of legal mechanisms and institutions governing the exchange of currencies is known as the exchange rate regime. The choice of exchange rate regime is inherently a political one, based upon macroeconomic policy goals and conditioned by historical experience (say, if you witnessed every neighboring country experience financial crises and dramatic economic contractions after transitioning from a managed to a floating exchange rate regime).

Witnesses 1 through 3 will be arguing around the question of China's choice of exchange rate regime. Conclusion: China should change regimes. Witnesses 4-6, I expect, will argue around the exchange rate and evidence of China's manipulation of the level. Conclusion: China should change the level, though this may entail a change in regime, the regime is a secondary concern.

More info on the evolution of China's exchange rate regime (and more broadly its capital account regime) can be found here.

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