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June 24, 2010

The Renminbi Runaround
By PAUL KRUGMAN

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 — an attempt to exploit U.S. restraint. To keep the rhetorical temperature down, the Obama administration has used diplomatic language in its efforts to persuade the Chinese government to end its bad behavior. Now the Chinese have responded by seizing on the form of American language to avoid dealing with the substance of American complaints. 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 selling its own currency and buying foreign currency. This policy is especially effective in China’s case because there are legal restrictions on the movement of funds both into and out of the country, allowing government intervention to dominate the currency market. And the proof that China is, in fact, keeping the value of its currency, the renminbi, artificially low is precisely the fact that the central bank is accumulating so many dollars, euros and other foreign assets — more than $2 trillion worth so far. 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

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And China. But right now we’re awash in cheap credit. suggest a rise of only about 2 percent in the renminbi by the end of this year. by running an artificial trade surplus. As of Thursday. Meanwhile. Of course. is aggravating that problem. So where does last week’s policy announcement fit into all this? Well. wants (and has the right to demand): a much stronger renminbi. they claim. by the way. putting off action until something — it’s hard to say what — comes up.S. What the Chinese have done. But these companies hoard cash rather than passing on the benefits to their workers. it’s time to talk about trade sanctions. sometimes up.NYTimes. The undervalued renminbi is good for politically influential export companies. hence the recent wave of strikes.com/2010/06/25/opinion/25krugman. China needs to stop giving us the runaround and deliver real change. And if it refuses.html?hp=&pag. destructive housing bubble. that was just a diplomatic euphemism for what America. This does not. This is basically a joke. Chinese policy makers know perfectly well that although U. in which traders agree to exchange currencies at various points in the future. what’s lacking is sufficient demand for goods and services to generate the jobs we need. trade. the currency was only about half a percent higher than its typical level before the announcement. And all indications are that watching the future movement of the renminbi will be like watching paint dry: Chinese officials are still making statements denying that a rise in their currency will do anything to reduce trade imbalances. 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.. and prices in the forward market. So what comes next? China’s government is clearly trying to string the rest of us along. That’s not acceptable.nytimes. China has allowed the renminbi to rise — but barely. mean that China gains from its currency policy.. sometimes down. officials have indeed called for more currency flexibility.Op-Ed Columnist . were at least supplying us with cheap credit — and you could argue that it wasn’t China’s fault that we used that credit to inflate a vast. to increase the “flexibility” of their exchange rate: it’s moving around more from day to day than it did in the past. Having the currency bob up or down slightly makes no difference to the fundamentals. and the world.com http://www.The Renminbi Runaround . 2 of 2 26-06-2010 07:41 .