USA and China Deftly Avoid Conflict on RMB

During Prime Minister Yukio Hatoyama’s stay in Washington, Presidents Barack Obama and Hu Jintao also held a U.S.-China summit. Though the meeting drew interest surrounding the outcome of the countries’ confrontation on the renminbi issue, both leaders showed a willingness to compromise in order to repair their relations even as they insisted on their own country’s point of view. It seems a clash between the United States and China was averted and the stage set for a renminbi revolution — a welcome development for the whole world, Japan included.

China has incrementally increased the value of the renminbi against the dollar since the summer of 2005, but has kept it steady at an effective rate of 6.8 RMB to the dollar ever since the 2008 financial crisis. China’s artificial depression of its currency led to an invasion of cheap Chinese-made products in the United States, where they stole American jobs amid continued high unemployment. This theory, which faults the renminbi, has taken root.

A desire to get tough with China is coming to a head. In Congress — which is faced with fast-approaching mid-term elections — 130 lawmakers from both parties sent a letter to the Obama administration demanding that it take countermeasures against China.

A move to a flexible renminbi rate policy that reflects market forces is desirable in the long term, for China’s economy as well as the world’s. However, pressure from foreign countries to revalue the currency will only backfire. It only makes it more difficult for the Chinese authorities — who do not want to appear domestically to be cowed by foreign pressure — to act. What’s more, once a precedent has been set, the currency will undoubtedly become the subject of financial speculation. Foreign pressure entails the risk of an escalation into a trade war, with sanctions leading to more sanctions. And it is not as though U.S. employment will improve if only the renminbi were revalued.

Thus, it was a wise decision for the Obama administration to postpone the publication of a report on foreign currency exchange, in which China might have been labeled a “currency manipulator.” In time for the summit, China, too, announced a policy shift in awarding government contracts for high-tech products, clearing the way for foreign firms to enter the Chinese market. It appears that both governments worked scrupulously to lay the groundwork in preparation for the summit.

China will probably approve of incremental rises in the renminbi at calculated intervals. However, the revaluation will not solve the trade imbalance or the problems facing China’s economy. What should attract our attention are the structural problems that allow Chinese goods to be made so cheaply, such as low wages, opaque financial arrangements, and an inadequate social security system. To secure stable economic growth, there must be reforms to give accumulating profits back to the Chinese people (especially from state-owned enterprises).

Rather than engaging in bilateral negotiations to deal with foreign exchange problems, it would be much more fruitful to urge structural reforms in China at a multilateral forum such as the G20. Owing to its own experiences, Japan could contribute greatly to such an effort.