China made a decision over a decade ago to fix its currency to the dollar. This was before the massive explosion of growth and before the Asian financial crisis. They have managed one of the most successful hard pegs in the region, and it probably saved them a lot of grief during the crisis of 1997-98 … Yet, the fact that they had kept such a hard peg for so long began to work against them. With all that growth, people recognized that this exchange rate would not work forever … Most people also realize that a large sudden revaluation would be bad for China. This is a gradual process. Too gradual for some tastes.
Let me concede two things – the term manipulation is not needed here. We both seem to agree that the yuan needs revaluation and I’m certainly not advocating a rapid revaluation. Secondly, Dr. Polley’s post in its own way is a nice summary of what Jeff Frankel has written on this topic – a paper we noted here.
Brad Setser notes that Stephen Jen (not Roach as I originally wrote) is now arguing that China’s fixed exchange rate is creating more problems than benefits. Brad also picks up on my comments about Chinese monetary policy:
China isn’t importing US monetary policy. It is importing a monetary policy that is substantially looser than the monetary policy here in the US. Right now, key domestic interest rates in China – whether the deposit rate or the interbank rate or the PBoC sterilization bill rate – are well below US rates.
OK, this is just a sampling of the latest on Chinese economic policy from Brad. Enjoy the rest of his post.