The FT’s Lex -- in the course of article that seems to suggest that the RMB will rise by far less than the market now expects -- says that China doesn’t import enough food for a stronger RMB to have much of an impact on inflation:
"A stronger currency would, however, do little to make food cheaper. China is largely self-sufficient in food, which accounts for just above 1 per cent of imports. Indeed, imports overall are equivalent to less than a third of total gross domestic product – low compared with its neighbours."
The argument that Chinese imports are small compared to its neighbours is a red herring. China’s imports are larger relative to China’s GDP than the United States’ imports, and China has a lot more in common with other continent-sized economies than its small neighbors.
The argument that the availability of lower-priced imports couldn’t hold down the price of food also seems suspicious. Afterall, if the RMB rose -- and not just against the dollar but against a host of currencies -- it might make sense for China to start importing food even if it doesn’t now. In order to compete against imports, Chinese producers would have to lower prices. So long as there aren’t trade barriers, the international price of a commodity should affect domestic prices even in the absence of a lot of physical imports.
Moreover, back in 2004 and 2005, a common argument against RMB appreciation -- one made most notably by Dr. Stiglitz -- was that RMB appreciation would drive down the price of rice, and thus hurt China’s many poor rice farmers. Then the worry was that rice imports would push prices down to too low a level. Sebastian Mallaby:
"The country’s technocrats were convinced years ago that revaluation made economic sense. But revaluation would cut the price of food imports, depressing earnings of Chinese farmers. Faced with simmering discontent among rural Chinese who have been left behind by China’s coastal boom, the dictatorship fears that currency revaluation could unleash furious protest."
If a stronger RMB would have lowered the price of rice then, it is hard to see why it wouldn’t also tend to bring prices down now. At minimum, concerns that a stronger RMB would hurt China’s poor farmers should no longer be an impediment to a faster move in the RMB.
A stronger RMB would also clearly help reduce the need to raise the RMB price of oil. And no one doubts that much of China’s oil is now imported.
The real problem, at least in my view, that China faces using an appreciating RMB as a tool against inflation is rather different. A slow controlled appreciation creates a strong incentive to move money into China (and reduces the incentive to take money out of China). It thus generates capital inflows that add to the central banks’ already large difficulties with sterilization. A steady controlled but fully expected appreciation consequently does little to slow money growth.
And if you think that China’s inflation stems from too much money rather than too few pigs* (or too little rice), that is a problem. The only solution, as Michael Pettis emphasizes, is a big one-off revaluation that changes expectations.
* Ken Rogoff was the first to use this phrase