If we want an appreciation in the Yuan, maybe we need to stop calling for one

It’s quite obvious, and has been so for a while, that the Chinese currency, the yuan, is undervalued. This is obviously of consternation to the United States, whom would desire a depreciation in their currency against the yuan – the policy is called beggar thy neighbour for  a reason, and the US is principal amongst those . During debate between those who attack the Chinese policy for it’s detrimental effect on the US economic health and those who attack straw men in reply, it’s quite easy to overlook that the policy is quite damaging to China itself.

The Chinese economy is currently facing inflationary pressures, pressures that would usually be alleviated by an appreciating currency.  I am quite certain that the technocrats and nomenklatura in Zhongnanhai know this – and may also fear that inflation may spark some degree of unrest.

Yet the leadership is in no position to allow appreciation and have instead begun price controls. The adoption of good policy called for by the US would too easily be a defeat in international pissing contests. We can tell stories about how they can’t allow this to happen because of the memories of 19th century capitulations and a resulting “never again” attitude , or about the rising nationalism and jingoism of the younger middle classes – they may well be true stories – but think about all the intra party positioning.

In the next few years a leadership transition is expected, presumably to Xi Jinping. But of course, such transitions are always the best time to try and nudge things around if you’re angling for more power in a political system. Whilst Xi and his relevant faction may not need to prove themselves sufficiently bellicose as Kim Jong Un is apparently required to (and his father was before him), it’s fairly easy to see that political rivals would use any sense of acquiescence to the United States were monetary policy to be changed. I can’t imagine any country where politicians would not attack their opponents adoption of a policy urged by a “rival” power regardless of the policy’s virtues.

The opacity of an organisation that has recently managed to keep its squabbles more or less out of the public eye and more importantly the public sphere obscures this and heightens this idea of the party as an agent in itself. But the party does have a long history of allowing internal squabbles to foster terrible policy at large. In fact, in some ways it’s the story of modern China. The great crimes of the party against the Chinese public, from the Great Leap Forward; the Anti-Rightist Movement; the Cultural Revolution and multiple Tiananmen incidents culminating in the 1989 massacre; they all make sense far less in terms of true ideological fervour or even an attempt to maintain power in the party itself than they do in terms of internal struggles. These dynamics domestic policy is reflected to a far milder extent in foreign policy, where less people pay attention, but does result in things such as pointless bellicosity in the Taiwan straits. So long as Taiwanese politicians were not doing anything that might give ammunition to an internal pissing contest, mainland policy has been far more sanguine.

In light of this history, it’s entirely plausible that the demands of internal party disputes may lead to crude and possible destructive policy such as price controls simply as tactics in an internal game.

This leads to another conundrum. The Chinese leadership might want to appreciate the currency, but cannot, since to do so would be to “act weak” and give ammunition to political rivals. The US Leadership also wants an appreciation in the Yuan, and they might understand (they may have even been told) that the Chinese leadership also wants one but cannot do so as long as the US Leadership demands it. But the US Leadership cannot not demand it, because to do so would be to “act weak” and give ammunition to the opposing party.


About Richard Tsukamasa Green

Richard Tsukamasa Green is an economist. Public employment means he can't post on policy much anymore. Also found at @RHTGreen on twitter.
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derrida derider
derrida derider
13 years ago

Of course, it’s not just opaque power struggles in communist dynasties that trigger this sort of thing – transparent power struggles in oligarchy-run democracies can too. I reckon its only a matter of time before Obama lashes out somewhere purely to prove he’s not Jimmy Carter reborn. And look how the Iraq folly passed Congress with just one dissenting vote because politicans who knew better were egging each other on.

The better tactic for the Yanks here is to actively seek a good face saver. Give the likely winner a cheap triumph, part of which is “oh, by the way, those thoroughly cowed Yankee running dogs have also been forced to agree, in the face of their utter humiliation over that incident in the Taiwan straits, to devalue their dollar against our Yuan”.

13 years ago

Give the likely winner a cheap triumph

I dunno – I once had a cheap Triumph – 6 cylinders and petrol injected – bloody thing only stayed in tune for week before it became either a 3.5 or 5 cylinder again.

13 years ago

The adoption of good policy called for by the US would too easily be a defeat in international pissing contests.

Political Grandstanding, Rule #1: always select a pissing match that you have a reasonable chance of winning. The challenge of buying US dollars faster than Paulson’s electronic printing press can generate more does not fall into the aforementioned category.

But the US Leadership cannot not demand it, because to do so would be to “act weak” and give ammunition to the opposing party.

I rather suspect that if the current US treasury believes that thumping the table will make China buy more US bonds, then they will thump long and loud (while pressing the “print money faster” button with the other hand). The Yankees have done well at the brinkmanship game in the past.

China’s strategy appears to be a matter of slow and steady diversification — buying sovereign bonds from non-US sources (e.g. South Korea) and I believe they were throwing cash into Europe as well. They do everything at glacial pace — one of the properties of a massive centralized bureaucratic system. It’s good at stability, not real good at adaptation. Even if they all wanted to revalue the Yuan, it would still happen very slowly.