China Power

Paper Tiger

Revaluation is no magic bullet for China’s economic imbalances, Guy de Jonquières says.

Just taking up where I left off yesterday on the issue of whether China should be pressured to revalue the renminbi. As I mentioned, New York Times columnist Paul Krugman wrote a pretty strident column calling for tough US action on the issue.

But even if China does relent under pressure (something there’s a precedent for in 2005, but it’s likely more loathe to do now), would this resolve the underlying issues? I asked Guy de Jonquières, a senior fellow at the Brussels-based European Centre for International Political Economy, for his take on the ongoing debate and he told me yesterday that he felt revaluation is only part of what needs to be done.

He told me:

‘The issue, to me, is not revaluation; it’s the adoption of a more flexible and more market-based currency regime. Nobody knows what the “correct” level of the RMB exchange rate is or should be: you only have to look at the wide fluctuations of the US dollar exchange rate over the past 18 months to see how meaningless such yardsticks are. What China does need to do is to start dismantling the elaborate system of intervention that is used to manage its exchange rate, which seriously distorts its domestic financial system and inhibits effective economic management. Without that, and the removal of artificial constraints on interest rates, there can be no serious financial reforms.’

Setting aside the possibility of more comprehensive reforms, de Jonquières told me he believes that it’s going to be difficult for Obama administration NOT to cite China as a currency manipulator. But he added that even if it does, it’s a paper tiger.

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‘First, because there are let-out clauses enabling the president to exercise discretion over whether to impose trade sanctions. Second, because it’s hard to see how these could be imposed without violating WTO rules, which would expose the US to a disputes challenge by China. If China won and the sanctions remained in place, it could seek—and would likely obtain—WTO authorisation to retaliate against US exports, up to the amount of exports lost because of sanctions. Since China exports vastly more to the US than the other way round, this looks like a no-brainer.’

Of course he makes the point that it anyway isn’t in the interests of the US to flout WTO rules, which would undermine both its legal and moral standing in the organization. An organization that he rightly argues ‘provides the only real leverage it has over China’s trade policy’.