China Tells

Is it all about RMB? Or, it is all about RMB, fool! It seems to make a lot of sense if we link the happenings recently in a chronicle way. The logic goes like this: There is a huge imbalance in world economy and trade, notably the dramatic trade surplus from China and trade deficit from USA. One of the top mandate of Obama administration is to address this imbalance, by bringing down the account surplus of China and account deficit of America. One of the key measures to make it happen, seems to lie in the exchange rate of RMB, according to some academics and media from the West (See article from NYT). It seems, however, that China government is resisting such a change. By continually sticking to the argument that RMB exchange rate is purely internal, China government refuses to appreciate RMB, which is estimated to be 20% undervalued at least. American government is not in a position to enforce the revaluation of RMB, however, what they can do, is to loosen their own monetary policy and flood the market with cheap money. Under such a scenario, international speculators and investors borrow USD cheaply and pour the hot capital into China with an appreciation expectation. It is like a reverse expectation: the more you resist appreciation, the more people expect you to appreciate; and the more people expect, the more pressure for appreciation to happen.

It seems that Obama administration is well prepared to talk Chinese into revaluing the RMB during his visit to Beijing in Nov. There has been several rounds of trade skirmish between USA and China (See Article from Chinatells). There is a large speculation that such mutual rounds of skirmish is just a warm up for the real battling in Beijing when Obama meets Hu Jingtao. No matter the accuracy of such speculation, it seems that Obama is determined to put some pressure on China government to make some compromise in terms of restoring the international economy order in America’s wish. To put some fuel into the fire, American academy and media have not been idle in creating the argument to support the government.

Can China continue to say NO to Obama, politely? I doubt so. It is not about external pressure, but internal chaos. It is well recognized from both sides that the artificially low RMB rate is a key to protect the employment in China’s export sector, and China government can not afford to let workers lose their jobs due to the appreciation of RMB. On the other hand, however, can China sustain the continual inflow of international capital and inflation pressure with a pegged exchange rate? It seems Dejavu to me again that Americans depreciate their currency and export the inflation to China (oil and gold looking good), and in the end whether Chinese revalue the RMB is of secondary relevance. To have some exposure to commodity is definitely a hedge to such a potential avalance in the FX (See article from Chinatells), but probably it is not enough to entertain a whopping 2 trillion reserve. In the end to stablise the domestic price and financial system, probably China central bank will have to react with a tighter monetary policy and addjusted exchange rate, which is exactly what the punters are hoping for.

奥 巴马此次访问北京，人民币汇率问题被炒到主要议题之一。之前的布什政府希望国际货币基金组织压迫中国改变汇率，但收效甚微。此次奥巴马政府来势汹汹，意在 改变布什政府给人造成的软弱形象。之前中美政府就贸易进出口进行了多轮倾销和反倾销小斗，再经过这一系列的热身后，也许总统亲自光临北京就要动真格了。