DESTABILIZING STABILITY

Imagine a circus act in which the high-wire artist tried to maintain balance by keeping his body stiff and his knees locked. The rigidity of the effort would be laughable, at least until he lost his balance and fell.

Yet, in all seriousness, the Chinese leadership repeats that its rigid currency policy, which has frozen the yuan (also called the renminbi or RMB) against the dollar for 18 months, is a contribution to stability in the international economy. Listen to Premier Wen Jiabao in a rare sit-down interview with the media on Sunday: “Keeping the yuan’s value basically steady is our contribution to the international community at a time when the world’s major currencies have been devalued.”

De-valued? Against the RMB, virtually every other major currency has risen in value even as they fluctuate against one another in response to market changes. The exception about which Wen is complaining, of course, is the dollar. China has effectively pegged the RMB at 6.8 to the dollar since July 2008. As a result, China’s contribution to a dynamic global exchange rate equilibrium is nil.

The truth is that:

• China, like any IMF member, is obligated to change the value of its pegged currency as needed to reverse imbalances in trade flows and payments. That’s the meaning of IMF Article 4. Exchange rate stability is no virtue; it’s a violation of a country’s international obligations when imbalances need to be corrected.
• The “protectionism” that Wen also complained about in the interview is a direct result of China’s aggressive overreliance on export-led growth. The premier seems to argue that China cannot afford to give up the weak renminbi (the yuan by another name) because its trading partners are exercising their legal rights to commercial self-defense. But what accounts for China’s flood of low-priced exports that prompts trading partners’ antidumping and countervailing duty cases? The massive export subsidy delivered by means of an undervalued RMB. Exchange rate stability is a source of, and not a solution to, trade tensions.
• Wen allowed as how China is concerned that inflation might someday become a problem there. He’s already right. The excessive inflow of dollars and other hard currencies has to be “sterilized” by the Chinese government’s exchanging them for local currency, thereby flooding the market with renminbi. The excessive growth in money supply – China’s money growth is about double its real economic growth – creates constant inflationary pressure. Looked at another way, China is forcing its own people to pay extra renminbi, the only money most of them are allowed to possess, in order to buy anything from abroad. That includes energy and components as well as food and other consumer goods. Here again, stability adds to and does not diminish the problem.

Chinese officials can assert that up is down, black is white, and foul is fair. That won’t change reality. In fact, China’s currency policy is a burden to its own consumers, an affront to its trading partners, and a threat to the international economy. It ought to stop – now – before we all fall off the high wire.