Many in America and Europe argue that appreciation of China’s nominal exchange rate is the way to get rid of the persistence of China’s current account balances and head off economic and political tensions with the industrial world as China recovers ahead of the pack. By artificially depressing the value of the renminbi (RMB), China takes jobs away from its trading partners, so the argument runs. As this week’s lead from Yiping Huang suggests, this is a superficial view of the problems that will emerge around China’s recovery from the global crisis. Exchange rate adjustment is only one, and not the most important, part of the solution to alleviating the big structural imbalances in the global economy focused on China. Problems in the real economy will continue to produce long term current account imbalances no matter what China might be reasonably expected to do with the nominal exchange rate. The priority for Chinese policy makers (and American policy makers too) should rather be on comprehensive structural reform of labour, capital and resource markets, distortions wherein are the fundamental source of China’s imbalance problems. Huang’s insight is important and is critical to getting both Chinese and international policies for sustained global recovery targeted right. This week we shall also look at an exchange rate problem of another kind in East Asia, the levitating yen, and how the strong yen impacts on Japanese recovery.
In Brief
There are still many risks along the way to recovery from the global financial crisis. The American economy remains weak, with unemployment at 10 per cent, and Europe and Japan remain in the doldrums. China's powerful recovery should be a bull element for the world economy. But could China's recovery be more at the expense of recovery elsewhere than a driver of it? Will successful Chinese recovery, while most of the industrial world continues to stagnate, again widen imbalances in savings, investment and current account imbalances, and end in trans-Pacific economic and political conflict and recrimination? These are real risks of which some aspects of the history of relations between Japan and the other emerging powers and the industrial world in the Great Depression offer warning.