Thursday, April 1, 2010


Jim O’Neill, chief economist at Goldman Sachs, put in his two cents’ worth to the currency debate in a April 1 Financial Times op ed entitled “Tough talk on China ignores economic reality.” His argument seems to be:

• At 14-15 percent, China’s annual domestic demand growth is “too strong,” adding to inflationary pressures in China.
• China’s “strong imports” are a positive force in the world economy.
• The RMB is not undervalued but rather “ very close to the price it should be.”
• “[G]iven the past weakness of the dollar and the strength of domestic demand in many big emerging countries, China included, the US has a chance of reaching its goal [of doubling exports over the next five years].”
• So, it’s counterproductive to press China to change its exchange rate regime.

Huh? Is this some sort of April Fool’s piece? Let’s try to think straight about each piece of O’Neill’s argument:

• As O”Neill himself recognizes, revaluation of the renminbi is deflationary, not inflationary. Inflation arises when the total supply is restricted. A revaluation helps remedy that problem immediately and over time. First, domestic prices would fall as the price of imports (energy, raw materials, components, luxury goods) fell and the supply of imports rose. Over the longer term, China’s domestic supply would be expanded, too, as some producers found the economics of producing goods for the domestic market more appealing than exporting. So, the inflation argument helps to justify a revaluation.
• If China’s expected trade deficit for March were to turn out to be more than a one-month wonder, the argument for China’s growth being good for the global economy would be more credible. However, a revaluation would help to open the Chinese economy to global competition on an on-going basis. Here again, O’Neill’s argument seems to work in favor of a revaluation.
• How can O’Neill argue that the RMB is not undervalued? China’s official reserves have reached stratospheric levels and are still rising. IMF rules require a rebalancing when trade flows or the balance of payments are imbalanced. That means a reversal of rising trends, not a slowing or a stabilization of them.
• How will past weakness of the dollar help future US exports when it was associated with the world’s largest trade deficit? How will continued strength of the dollar against the renminbi help increase US exports?
• O’Neill seems implicitly to endorse the old chestnut that “China doesn’t respond to foreign pressure.” The other side of that coin is “no pressure, no problem.” Silence is just a form of assent.

The facts and the law are on the side of an immediate, substantial revaluation. Economic logic indicates that a revaluation is in the overall interests of the not just the US, but China and the rest of the world as well. That much should be apparent to all independent analysts by now. It’s time to stop fooling around and act.

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