The USA thinks the answer to the huge imbalance in world trade between China and the rest is a revaluation of the Chinese currency, the renminbi.
China has responded strongly to this advice, telling the USA not to meddle in what China regards as her business. Premier Wen advises the USA to look to itself to sort out why it imports too much and exports too little. He managed a good side swipe at the hapless US President, by reminding the world that the uSA refuses to export some of her hi tec wizardry to China, items which China would like to buy.
The renminbi is a managed currency. There are tight restrictions on who can buy it and how much they can buy. It is not the official currency of either Macau or Hong Kong, relatively more exposed parts of the Chinese economy to world finance and trade. As Premier Wen explained, policy is to “keep the yuan (the highest unit of the renminbi currency) basically stable at a reasonable level”. The managed rate will only be changed if it suits China to change it. At the moment they think it adds to world recovery, as it enables China to grow rapidly.
There are two important questions for analysts to ask.The first is, could external events and US pressure lead to such a revaluation? The second is, might China wish to revalue the renminbi any time soon for her own reasons?
It is extremely unlikely that China will give way so soon after making a clear statement she has no intention of doing so. That would entail loss of face. China is also all too conscious that she owns large sums in dollar based investments, so any revaluation of the yuan immediately leads to a substantial loss on her holdings, as well as making it a bit tougher to export. The main thing she wants from the US – the cancellation of weapons exports to Taiwan – is unlikely to be conceded by the President, as that would entail too big a loss of face for him. US diplomacy is counter productive, delaying a revaluation which might other wise occur.
For there are domestic reasons which might lead to a revaluation. China has a growing inflation problem. The rate rose to 2.7% in February, and could rise a lot higher this year, following the explosive injeciton of credit and spending over the last year. China has started to rein in by ordering more bank reserves. She can do more of the same. A revaluation would also help cool the domestic economy, whilst cutting the prices of imports and helping a little with the inflationary pressures. She has not yet raised interest rates, fearing that could abort the recovery in a world where other economies are still struggling.
A revaluation of the renminbi is possible, but is not an immediate probability. The US could delay it further by overdoing the pressure on China. The USA does not have a very strong hand. The outside risk is the USA for internal political reasons overdoes the posturing against China and embarks on a course of tariffs or other restraints on trade. A more likely outcome is delay, followed by the inevitable revaluation of a strong currency for a country which remains super competitive at these exchange rates.