International concern remains high that China hasn’t done enough to rebalance its economy and help reduce global trade and currency imbalances. While Beijing continues to send reassuring messages about making its currency more flexible and relying less on exports, the reality over the past year suggests there are some less comforting nuances.
With Chinese President Hu Jintao preparing to head to Washington next week, there are four issues that are worth revisiting to better understand the situation.
The first is what has been the headline-grabbing issue of currency revaluation. China claims that it’s moving to a more flexible system and gradually appreciating the currency. Flexibility is clearly desired, but a major appreciation isn’t. Beijing tends to adjust its currency in light of international political considerations, and significant upward movement has been seen shortly before three high-profile events—Premier Wen Jiabao’s meetings with Barack Obama and European leaders in the early autumn, the G-20 meeting in November, and now Hu’s upcoming US visit—since the renminbi (yuan) was allowed to fluctuate in June 2010 following the collapse of the euro.
The net change so far has been an appreciation of only 2.5 percent—a far cry from the 20 percent suggested by mainstream observers. Political events clearly matter in the 135 daily adjustments taken by China’s central bank since June 21. In September, during the build up to Wen’s meetings, the renminbi appreciated 1.5 percent; in November prior to the G-20 meeting it appreciated another 1 percent; and after confirmation of Hu’s visit in late December, it went up another 0.6 percent. During these three episodes, the renminbi moved up 34 times and down just 8 times. Aside from these three periods, the renminbi moved up roughly the same number of times it moved down (48 to 45) and on balance actually depreciated by 0.6 percent.
Looking at this, it’s no wonder critics continue to be agitated by the perceived pace of revaluation of the currency. Speculation is now focused on whether the recent adjustments are real or just another politically driven half step. The most likely scenario appears to be continued event driven small appreciations with a net rise of no more than 5 or 6 percent over the coming year.
The second issue to consider is China’s trade surplus—it’s lower than before the financial crisis, but it continues to be larger than expected. Despite significant wage increases and cost pressures, China’s labour productivity remains high relative to competitors. And, even though global trade is down, China is still capturing a larger share. Any reduction in exports due to diminished demand in the United States and Europe appears to be moderated by gains in emerging markets, meaning that China’s competitors in the developing world may become as vociferous on currency issues as the West.
The third concern is China’s ability to increase consumption and reduce investment to moderate global imbalances. The fact here is that any hopes for change need to be tempered. Although Chinese consumption is exceptionally low as a share of GDP, consumption has been increasing at an impressive 8-9 percent annually for years. While it makes sense to expect a rebound in consumption after a recession in the United States and Europe, this argument is less convincing in China.