Treasury Secretary Paulson apparently plans to shift the focus of the Strategic Economic Dialogue away from the renminbi.
"The currency issue is pretty much off the table,’’ said Donald Straszheim, who monitors Chinese economic issues as vice chairman of Roth Capital Partners, in Newport Beach, California. ``The currency appreciation has clearly helped everyone concerned.’’
Straszheim’s quote is consistent with the background noise coming from the Administration. Brinsley and Yanping:
"U.S. Treasury Secretary Henry Paulson’s semi-annual talks with Chinese officials will focus on energy and the environment as a rising yuan eases the exchange- rate tensions that marred past meetings."
Energy is important. But I think shifting the focus away from the exchange rate is a mistake.
There is little doubt that RMB’s appreciation against the dollar -- together with the US slowdown -- has led to the stabilization of the US trade deficit with China. But that deficit remains large absolutely. Not growing isn’t quite the same as falling.
More importantly, though, the US shouldn’t be focusing on the RMB-dollar. It should be focusing on the broad nominal value of the renminbi. And on a broad nominal basis, the RMB hasn’t really appreciated. The RMB has slid against the euro over the same period when it has appreciated against the dollar. That has led to a reallocation of the basis of Chinese export growth away from the US toward Europe. The real renminbi -- a measure that includes inflation differentials -- is basically where it was in 2000, with most of the appreciation coming from an acceleration in Chinese inflation rather than a rise in the renminbi.
The fact that it hasn’t fallen along with the dollar since 2005 is welcome. But not falling at the same pace as the dollar is a low bar. The RMB should be a lot higher, particularly against European currencies.
Between 2004 and 2006, US officials often complained that European officials wouldn’t join them in putting pressure on China to let the renminbi appreciate. The US now seems to be returning the favor, and ignoring Europe’s growing concerns about renminbi weakness. Rather than taking credit for renminbi appreciation against the dollar, the US should -- in my view - continue to emphasize the importance of broad renminbi appreciation against a basket of the currencies of its trading partners.
On a broad basis, the renminbi remains significantly undervalued. That is what China’s still strong export growth and enormous reserve growth tells us.
Stephen Green of Standard Chartered forecasts that China’s current account surplus will stay constant in nominal terms in 2008 (that implies that it will fall relative to China’s GDP). That isn’t good enough. A constant Chinese surplus in the face of an enormous rise in the surplus of the oil exporting economies implies a larger increase in the nominal deficits of the other oil-importing regions of the world economy. The US deficit isn’t likely to fall in nominal terms if oil stays at its current levels. But it isn’t going to rise as rapidly as in the past either.
The burden of adjustment is being shifted to Europe and to some smaller Asian economies that import oil and compete with China in the export market. The world would look much different if the rise in oil prices was bringing China’s surplus down. Then the country with the largest existing surplus would be clearly participating in the adjustment. If oil falls back, at current exchange rates, I would expect China’s surplus to resume its growth. China seems to have slowed the pace of renminbi appreciation against even the dollar recently. I don’t yet see signs that China has really reoriented its economy away from exports -- as opposed to reoriented its economy away from exporting to the US and toward exporting to Europe and the oil-exporting economies.
And yes, I recognize that China has its own concerns about US policy. But the right response to China’s concerns about dollar weakness continues to be that the US did not think it made sense for China to link its currency to the dollar at an undervalued exchange rate to begin with. I will have more on the important New York Times story later.