Brad Setser, just returned from a 10 day trip to China, offers some very interesting thoughts today about China’s exchange rate policy as a result his conversations with various Chinese economists. The central dilemma Brad touches on is this: what type of growth strategy is best for China? Should they continue to follow the strong dollar policy of the past few years (BWII), and its implied reliance on cheap money and rapid export growth? Or is it time for China to move away from export-led growth, let the dollar fall, and concentrate on developing internal economic markets? After all, as Brad points out, “it is not necessarily a good sign if one of your biggest customers can only afford to buy your products if you extend credit on generous terms.” The latter logic suggests that a significant renmimbi revaluation may happen sooner rather than later.
Stephen Roach also has some thoughts on the subject based on his most recent visit to China. Roach notes that he encountered a rather consistent message from Chinese policy-makers during his trip: the government’s efforts to slow excessive growth last year have largely worked, and the urgency to slow the economy has passed. One implication may be that a significant renmimbi revaluation is less necessary now than it was 6 or 12 months ago.
I leave it as an exercise for the reader to sort this out.