Wednesday, March 3, 2010

China Must Ignore Calls for Stronger Yuan

In an article last week in BusinessWeek, Shaun Rein argues that China should ignore (for now) the international community's calls to allow its currency to strengthen. China's government has maintained an artificially low yuan for several years as part of a strategy to promote economic growth by making its exports cheap.

Americans have been calling for the Chinese government to allow the yuan to strengthen because thousands, if not millions, of American jobs have been lost to Chinese factories.

Rein gives the following reasons for his argument:
  • Centres of production would not necessarily shift back to the USA. If they shifted away from China they would move to other low-cost countries like India or Vietnam.

  • Workers in China are poor and would lose millions of jobs by allowing the yuan to appreciate to its normal levels.

This entire discussion has failed to recognise the impact on countries other than the USA and China of allowing the Chinese government to maintain an undervalued yuan. The Chinese government's aggressive interventionist policy to boost competitiveness of sectors like textiles has caused South Africa, for example, to suffer immense job losses.

China's continued currency market manipulations amount to a violation of workers' rights in South Africa and around the world. In African countries where unemployment is systemic and causes massive social problems, this rights violation is particularly severe. We should all join the call for China to allow its currency to appreciate as a step towards the progressive realisation of human rights around the world.


  1. Hey Galen, this post is kind of confusing. Doesn't your heading contradict your conclusion? And don't you think the last paragraph is far too emotionally-charged?

    What rights do you have in mind when you say China is violating workers' rights?

    Frankly, I'm uncomfortable with the phrases "currency market manipulations" and "artificially low yuan". I don't really understand the mechanism by which China keeps the yuan low, but it appears they do it by buying Treasury bonds and printing yuan:

    Isn't it fair to say that while other central banks target inflation and interest rates in deciding how much money to print, China's CB simply targets the exchange rate?

    I think Obama's language towards China is hypocrisy of the highest order, considering: a) how much he supports intervention in America's economy,
    b) how much the US government controls the Fed's monetary policy, and
    c) how much his massive government spending requires entities like China to buy US government debt:

    I'm with the Chinese on this one - Obama has a cheek trying to tell another country's central bank what to do, rather than focus on America's own problems.

    I do however agree with Obama when he says it's in China's interest "to allow their currency to appreciate because, frankly, they have got a potentially overheating economy":

    The point is that China's CB should be answerable to the Chinese people for inflating and devaluing their money, not to foreign countries and their workers.

  2. My conclusion does disagree with the title of my article - I have attempted to refute Shaun Rein's article, which uses that title. My intention was to open with a controversial (?) title, but I may not have achieved this.

    I would concede that "massive social problems" is an emotionally-charged expression and that I should have chosen a more dispassionate adjective here. However, emotions do have a place my blog posts. While I would leave them out of an academic piece, I think they should be acceptable here.

    In my view, developed economies manage inflation by 'manipulating' the interest rate market. China ignores inflation and 'manipulates' the currency market. By controlling interest rates, the central bank creates cheap money ( which can cause asset bubbles or at the very least malinvestment. By controlling the exchange rate, China's central bank maintains the yuan below its competitive-market level, boosting exports by making its goods cheaper and attracting foreign capital (,-Unsustainable,-Indefensible,-Unsound.aspx).

    So while US monetary and fiscal policies may have caused the recent worldwide recession (, China's monetary and fiscal policies may be causing worldwide unemployment (

    China's adoption of a valid, arguably very successful, monetary policy alternative does not make that alternative desirable or acceptable to the rest of the world.

    Obama may well be hypocritical here - I would have to read more to take a position - but that does not make him incorrect.

    Yes, China's central bank, like its government and judiciary, should be more accountable to its people. But when actions of China's central bank affect South Africans, our political process should hold China accountable.

  3. "If China did not start to appreciate the renminbi over the next few weeks, he [Stephen Green] said there was a good chance that the US would label China a currency manipulator. That could pave the way for the US to levy new duties on Chinese products. “How China responds will set the tone for the global trade and foreign exchange markets for the rest of 2010,” he said."

    Article at

  4. Just to add to the bibliography...

    China would face stiff new US penalties if it fails to revalue its currency under a bipartisan bill to be introduced in the US Senate today:

  5. 51% of [Chinese] depositors questioned — a record high since the start of the poll in 1999 — said they were dissatisfied with the current rate of inflation, compared with 46,8% in the previous quarterly poll.

  6. Currency Issue Still a Red Herring
    article at

    "Between July 2005 and July 2008, the Chinese RMB appreciated by 21 percent against the dollar. But over that 3-year period, the U.S. trade deficit with China increased from $202 to $268 billion. Why, then, do policymakers think revaluation is the key to reducing the trade deficit?"

    "encourage greater Chinese investment in the U.S. economy and a deepening of our mutual economic interests"

  7. China and Currency Valuation

    A predictably libertarian view:

    "The world would be better off if the value of China’s currency were truly market-determined, allowing better resource allocation. But compelling China to revalue under threat of sanction is unlikely to produce the desired results and quite likely to spark costly reprisals — and leave a lot of people worse off."

  8. Excellent links!

    The reasons I thought the last paragraph was emotionally charged wasn't the "massive social problems" bit, it was the parts about "violation of workers' rights" and "a step towards the progressive realisation of human rights around the world". Again, what "rights" do you have in mind? I can't think of any negative rights that are being violated. What about the rights of poor SA consumers to buy the most affordable goods available (even if they're subsidized by foreign governments)? For more, see:

    Trading with China is a win-win process

    Local textile industry

    As libertarians, I think we need to be especially careful about the meaning of "human rights". I think it's been overused by all sorts of interest groups pushing their agenda.

    That Cato@Liberty article was so refreshing & sensible, it reminded me why I admire Cato so much. Especially poignant was the point about a stronger RMB lowering input costs and therefore lowering Chinese export prices. This crucial factor is so often ignored in the usual commentary about trade & currencies.

    Final point, it seems to me that in targeting its exchange rate, China has effectively been a very responsible inflation targeter. Looks like it's inflation rate over last 10 years has been below the US rate (1.68 vs 2.72). If the Chinese government had been unfairly intervening to keep the RMB value low, wouldn't a high inflation rate have been the result? I think the US government is quietly hoping for high US inflation to devalue the dollar and boost manufacturing exports. Again, huge hypocrisy. What do you make of this argument? Check out:
    to c