The Chinese Currency Debate

As we have already noted, the rhetoric over US-China trade has been heating up recently, with much focus on the valuation of the RMB. Again, most of the dialogue, and most of the reporting, are politically oriented. As usual, if we really want to understand the matter from an economic and financial point of view, we can safely dismiss that rhetoric, as it is for the most part poorly informed. What has astonished me, in my regular reading, is how many economic and financial writers, who should know better, have been making assertions that simply aren’t well grounded in fact.

Anyone who has any interest in this issue can learn a great deal from this article by Michael Pettis of Peking University, which explains it very nicely, and dispels a number of popular myths. My accountant friends, in particular, will appreciate the distinction between real and realized losses. This should not put off non-specialists however; Dr. Pettis has written this for a general audience, and everyone will be able to understand it. Pay attention to his breakdown of who the winners and losers would be in China following any RMB appreciation, and you will see who the winners and losers are under the current arrangement.

We are often reminded that the deflationary depression of the 1930s was made much worse by protectionist measures, which set off a collapse in trade (Smoot–Hawley Tariff Act, anyone?). I’m not sure how to view that in the current context, but my best guess is that if any of this stuff gets past the rhetoric stage, and turns into real ugliness, it isn’t going to be a positive for economic recovery. Right now the US stock market is over-extended and due for a healthy pullback. What we don’t need is a global trade whizzing contest to turn a correction into a bear market.

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