Paul Krugman says "China needs to stop giving us the runaround and deliver real change" in its currency policy:
The Renminbi Runaround, by Paul Krugman, Commentary, NY Times: Last weekend China announced a change in its currency policy, a move clearly intended to head off pressure from the United States and other countries at this weekend’s G-20 summit meeting. Unfortunately, the new policy doesn’t address the real issue, which is that China has been promoting its exports at the rest of the world’s expense.
In fact, far from representing a step in the right direction, the Chinese announcement was an exercise in bad faith... In short, they’re playing games.
To understand what’s going on, we need to get back to the basics of the situation. China’s exchange-rate policy is neither complicated nor unprecedented, except for its sheer scale. It’s a classic example of a government keeping the foreign-currency value of its money artificially low by ... buying foreign currency. ...
There have been all sorts of calculations purporting to show that the renminbi isn’t really undervalued, or at least not by much. But if the renminbi isn’t deeply undervalued, why has China had to buy around $1 billion a day of foreign currency to keep it from rising?
The effect of this currency undervaluation is twofold: it makes Chinese goods artificially cheap to foreigners, while making foreign goods artificially expensive to the Chinese. That is, it’s as if China were simultaneously subsidizing its exports and placing a protective tariff on its imports.
This policy is very damaging at a time when much of the world economy remains deeply depressed. In normal times, you could argue that Chinese purchases of U.S. bonds, while distorting trade, were at least supplying us with cheap credit... But right now we’re awash in cheap credit; what’s lacking is sufficient demand for goods and services to generate the jobs we need. And China, by running an artificial trade surplus, is aggravating that problem.
This does not, by the way, mean that China gains from its currency policy. The undervalued renminbi is good for politically influential export companies. But these companies hoard cash rather than passing on the benefits to their workers, hence the recent wave of strikes. Meanwhile, the weak renminbi creates inflationary pressures and diverts a huge fraction of China’s national income into the purchase of foreign assets with a very low rate of return.
So where does last week’s policy announcement fit into all this? Well, China has allowed the renminbi to rise — but barely. As of Thursday, the currency was only about half a percent higher than its typical level before the announcement. ... Chinese officials are still making statements denying that a rise in their currency will do anything to reduce trade imbalances, and ... suggest a rise of only about 2 percent ... by the end of this year. This is basically a joke.
What the Chinese have done, they claim, is to increase the “flexibility” of their exchange rate: it’s moving around more from day to day than it did in the past, sometimes up, sometimes down.
Of course, Chinese policy makers know perfectly well that although U.S. officials have indeed called for more currency flexibility, that was just a diplomatic euphemism for what America, and the world,... has the right to demand...: a much stronger renminbi. Having the currency bob up or down slightly makes no difference to the fundamentals.
So what comes next? China’s government is clearly trying to string the rest of us along, putting off action until something — it’s hard to say what — comes up.
That’s not acceptable. China needs to stop giving us the runaround and deliver real change. And if it refuses, it’s time to talk about trade sanctions.