URL: http://www.brettonwoods.org/news/index.php/292/An_Alternative_Route_to_Appreciation_for_China_s_Yuan
An Alternative Route to Appreciation for China’s Yuan
by Andrew BatsonFebruary 16, 2010
With China’s economy surging and flirting with a property bubble, most analysts are prescribing the same remedy: a stronger Chinese currency that would help contain inflation.
A few economists are now turning that argument on its head, and proposing that China allow inflation to do the work of currency appreciation. Rather than adjusting the currency upward to make Chinese goods more expensive abroad, authorities should just allow rising wages and other costs to make Chinese goods more expensive, they say. To put it in the language of economists, they think China can get the needed adjustment in the real exchange rate without actually moving the nominal exchange rate.
China is under tremendous pressure from the U.S., Europe and other nations to shrink its huge trade surplus, which some blame for contributing to the financial crisis. A stronger currency could do that by making Chinese goods less competitive. But Premier Wen Jiabao and other government officials have pushed back against outside pressure on the currency. They have kept the yuan, or renminbi, fixed against the dollar since mid-2008, and a big, rapid move is widely seen as unlikely.