Against US criticisms of Beijing’s exchange rate policy, the paper entitled “The Case for Stabilizing China’s Exchange Rate: Setting the Stage for Fiscal Expansion”, explains the historical origins and rationale for China’s resolve to hold the exchange rate stable.
“It is a misconception that floating the rate would equilibrate the foreign exchange market as a discrete appreciation of the RMB against the dollar would neither reduce China’s trade surplus nor improve America’s trade deficit. Moreover, any appreciation of the Yuan would cause severe problems for monetary and exchange rate management within China”, said co-author Professor Ronald McKinnon from Stanford University, USA.
The huge trade imbalance between the two countries can be attributed to the large surplus saving in China and an even larger net saving deficiency in the US. Since the collapse of the housing bubble in 2008-09, US household consumption has plunged, depressing the global economy while reducing the US trade deficit. In contrast, China’s public finances have strengthened with the surge in tax revenues and corrected bad loan problems.
“For any newly reset Yuan-to-dollar rate to be credible as a monetary anchor, foreign ‘China bashing’ to get the RMB up must end. China and the USA should take the lead in providing an oasis of exchange stability to forestall the uncomfortable possibility of extreme deflations as witnessed in the Great Depression of the 1930s”, added Professor McKinnon.
Fiscal expansion in China is most effective when the exchange rate is stable. The authors agree that having the Americans agree to stability in the Yuan’ dollar rate is the natural quid pro quo for China’s engagement in a greater fiscal expansion.
This paper is published in China & World Economy (Vol. 17, Issue 1, pg. 1-36), and is available free online
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About China & World Economy
China & World Economy was launched in 1993 by the Institute of World Economics and Politics, Chinese Academy of Social Sciences (CASS). Originally self-published, the journal begins its official publishing partnership with Blackwell Publishing in 2006. Published six times a year, this journal combines original academic research works with policy review articles - many of its authors are distinguished Chinese economists from both academic and governmental circles. As the only English language journal in China devoted to the topic of Chinese economics, readers can expect objective, analytical and up-to-date quality content. With distinguished contributors such as economists from both the government and academic circles, the journal will provide an informed and balanced window on China, and will undoubtedly become essential reading for all those interested in China's development.
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