IMF Refuses to Pressure China on Currency Appreciation

IMF refuses to exert pressure on China. The United States miscalculates again.

During the annual meeting of the International Monetary Fund on October 9, finance ministers of the participating countries could not compromise on how to control currency conflict. As a result, the IMF refused to exert pressure on China on the issue of renminbi appreciation. The U.S. plan to use IMF influence to force the renminbi to appreciate failed to materialize. American pressure to force renminbi appreciation cannot solve the problem of global trade imbalance. On the contrary, it may lead to a currency war, which would seriously affect the pace of global economic recovery. It would not only hurt developing markets, including the Chinese market, but also impact developed countries. Moreover, it may cause inflation, which would increase the hardship on peoples’ livelihoods. The IMF refusal of the U.S. demand is beneficial to the whole world.

The renminbi is used as a scapegoat for America’s huge deficit and high unemployment rate, and the United States will use any means to try and push the renminbi to appreciate. During the IMF meeting, all the finance ministers clearly understood that the trade gap between the United States and China was a product of the international division of labor. Renminbi appreciation is not the solution to reversing the trade imbalance. According to IMF chief economist Olivier Blanchard, even if the renminbi and other Asian currencies appreciate by 20 percent, the resulting increase in American exports would only amount to a 1 percent growth in U.S. gross domestic product.

The American attempt to shift the focus from its economic crisis to currency and exchange rate policy cannot help economic recovery in the United States. On the contrary, it triggers a chain reaction from other countries to devalue their currencies, resulting in fluctuation of the global currency market, influx and outflow of hot money and confusion in the world financial market, all of which would seriously hinder the global economic recovery. The IMF acted rationally in refusing to follow American leadership and force renminbi appreciation.

Under the globalization of the world economy, sharp renminbi appreciation would not only cause many Chinese export enterprises to close, but many foreign enterprises in China — including American enterprises — would also suffer great losses. According to the latest statistics of the Chinese Ministry of Commerce, foreign companies completed 55.2 percent of Chinese import-export trade in 2009 and own 55.9 percent of Chinese exports. Over the past year, American enterprises made $150 billion in profits, the equivalent of profiting one trillion renminbi. Compared with the huge profit of foreign companies, Chinese companies only earned a slim sub-contracting fee. Foreign enterprises are the ultimate beneficiaries of the trade gap between China and the United States.

Foreign enterprises in China would greatly suffer from renminbi appreciation because their profits would decrease. The United States will eventually suffer itself if it persists in pressuring for renminbi appreciation.

Rapid appreciation of the renminbi would cause commodity prices to rise. This would not be good for world consumers, who are accustomed to the low price of Chinese goods. Rapid appreciation of the renminbi would also greatly impact the Hong Kong dollar, which is pegged to the U.S. dollar. Most of Hong Kong’s food, processed food and light industrial products come from mainland China. The appreciation of the renminbi would lead to high inflation in Hong Kong, thus increasing the burden on the population and affecting the harmony of the society. The government must therefore prepare for this.