America is getting more support in its efforts to pressure China to let the yuan appreciate. Bloomberg reports than the Bank of England’s governor Mervyn King is lining up with Jean-Claude Trichet and Hank Paulson:
Bank of England Governor Mervyn King is joining Jean-Claude Trichet and Henry Paulson to demand that China allow the yuan to strengthen at a faster pace.
King, usually reluctant to address exchange rates, used his quarterly press conference to warn that China is stoking “great currency tensions.” He said the issue will be discussed at this weekend’s meeting of officials from the Group of 20 nations near Cape Town. Trichet, head of the European Central Bank, insisted last week that China meet its “global responsibilities,” and Treasury Secretary Paulson called Beijing “out of step with the rest of the world.”
King’s remarks reinforce a shift in rhetoric from officials of the largest economies as concern mounts that China isn’t shouldering enough of the dollar’s slide, garnering an unfair advantage for its exporters. While the yuan has risen about 5 percent against the dollar this year, it has dropped by the same amount against the euro.
But is this rhetoric effective? While Japan has a proud tradition of using foreign pressure, or gaiatsu, as an excuse to force unruly domestic constituencies into line, attempts to pressure China on pretty much any front have led to either hostile responses or merely token measures. Persisting in a failed strategy is not a sign of intelligence (but perhaps the allied yuan-bashers are playing to their domestic audiences rather than expecting to have any impact on China).
In addition, the currency mavens are divided on whether a higher yuan will actually improve the balance of trade with China. As Menzie Chinn of Econbrowser explained:
Some new work presented at a recent IMF conference on Chinese trade suggests that we may need to revise some of our views on the efficacy of yuan appreciation for inducing expenditure switching.
To place matters in context, recall in this post on the enigmatic yuan, I discussed the estimates provided by Marquez and Schindler [pdf]. The point estimate that they obtain is perverse for Chinese imports — that is imports fall in response to a yuan appreciation.
Some of the low price elasticities — especially for Chinese imports — were rationalized on the basis of the idea that domestic value added in Chinese exports was quite small. Brad Setser (, , and ) has taken issue with this view, characterizing it as outdated. The debate goes on, partly because empirical work on the issue is hampered by data limitations.
And as Joseph Stiglitz pointed out, even if a pricier yuan were to improve our balance of trade with China, it probably won’t help our overall trade picture, since US companies would move production to lower cost centers like Bangladesh.
In a further sign of Chinese lack of interest in cooperation, the New York Times reports that the US is increasingly unhappy with Chinese product inspection and safety regimes that are applied only to imported goods. This appears to be a retaliation against the imposition of duties on Chinese coated paper (deemed to be benefiting from government subsidies) and US efforts to impose tougher safety requirements on Chinese products:
Few American industries have had more success in selling goods to China than makers of medical devices like X-rays, pacemakers and patient monitors. Which is why a recent Chinese decree was so troubling.
The directive, issued in June, called for burdensome new safety inspections for foreign-made medical devices — but not for those made in China. The Bush administration is crying foul.
Even more worrisome to the administration is that the directive seems part of a recent pattern in which Chinese officials issue new regulations aimed at favoring Chinese industries over foreign competitors, despite efforts by Treasury Secretary Henry M. Paulson Jr. to ease economic tensions.
“There is clearly a growing economic nationalism in China that is leading to discrimination against foreign investors in pillar sectors of the economy,” said Myron Brilliant, vice president for Asia at the United States Chamber of Commerce. “It’s not only a threat to foreign investors but it also undermines China’s transition to a market-based economy.”….
There has been little progress on Mr. Paulson’s top priority of getting China to let the value of its currency rise, a step that would make imports from China more expensive and exports to China cheaper, and there are worries that the dialogue will increasingly be seen as useless.
“I wouldn’t say it has hurt, but it has not helped very much,” said Gary C. Hufbauer, a senior fellow at the Peterson Institute for International Economics. “Clearly the Chinese see the dialogue as a stalling mechanism to prevent Congress from putting up barriers to Chinese goods.”
Ironically, the Chinese may nevertheless wind up tolerating some appreciation of the yuan, simply because the cost, in terms of domestic inflation, is rising in economic and political terms. Bloomberg reported that China’s central bank may increase interest rates again to moderate growth:
China’s growth in factory and property spending unexpectedly accelerated, stoking speculation the central bank will raise interest rates for a sixth time this year to cool the world’s fastest-growing major economy…
The central bank may raise the benchmark one-year rate from 7.29 percent as early as today after inflation matched a decade high in October and the trade surplus widened to a record. Surging factory spending increases the risk that China, the biggest contributor to global growth, will be left with idle factories, job losses and a supply glut if export demand slows.
But as discussed earlier, even if the US gets the higher yuan that it is seeking, it is not clear that it will do as much for our trade deficit as hoped.