Harvard professor China is very unwise to resist currency appreciation

 Currency is the right path. No matter how foreigners that China should act sensibly

Richard Cooper | text

2010   11 months, inflation in China more than 5% again. Early January 2011, Chinese Premier Wen Jiabao promised to control the rising prices people. The People's Bank of China has raised interest rates twice and to take other initiatives to curb inflation.

China's economic policy makers face a dilemma: they want to reduce the economic pressure, lower inflation, but do not want to be reduced by employment, especially employment in export industries. However, China's export surplus mainly due to higher inflation.

surplus of two major channels. First of all, the total exports of the economy an important source of increasing demand; Secondly, the export surplus surge, combined with a fixed exchange rate, increased the money supply and domestic credit demand. Export access to foreign exchange to be replaced by the central bank's renminbi, thereby increasing the money in circulation. By the central bank to raise bank deposit reserve ratio, such as by means of This increases the net inflow of capital, resulting in a substantial increase in money supply.

engineers will not ignore the laws of physics design of bridges or dams. However, China's policy makers, seem to always want to move in against the laws of economics, the economic policy One example is that China's export surplus huge (and net capital outflows do not match), if the exchange rate fixed, bound to inflation. From a long time to see a country can not both balance of payments surplus, and a fixed exchange rate, while restraining inflation.

So, how should China do? There are three choices. First of all, allowing a large number of domestic companies and the household sector capital outflows; Second, let the yuan rise, reducing the amount of U.S. dollar against the yuan; Third, it allows inflation, particularly rising wages, and thus indirectly to revalue the yuan, which is superior to direct appreciation .

the first set of programs is not a short-term solution. Open the outflow of capital could be quickly accomplished, but the public should have sufficient response capacity, to spend some time, especially in the possibility of currency appreciation still larger situations. Nevertheless, in terms of what kind of reasons, China's government should implement more liberal policies than in the past.

China's huge trade surplus, coupled with excessive aggregate demand, apparently currency appreciation is the answer. Chinese officials have stressed that, due to low profits, China's export industry is weak. However, the main reason for thin profits of foreign trade export business competition, and currency appreciation will affect all exporters. Some companies will find that after the revaluation profit, and exit the industry. This helps to alleviate the economic pressure, but not overall damage caused to the export industry.

third option allows a small inflation, can replace the appreciation from the function, in particular the export sector inflation. The latter will eventually lead to inflation, contrary to the Government's stated objectives.

currency is the most attractive option, because it will relieve inflationary pressures. Meanwhile, the yuan price of imported goods, or on imported goods competing with commodity prices, will directly generate downward pressure.

alleged that the reason why the Chinese government to resist currency appreciation, is because some foreign pressure on China. Mainly the U.S. and Europe, his voice has been great, and now increasing in Brazil and some Asian countries. Very unwise to do so. It's like a wayward young man, smoking is bad for their parents warned him, so he have to smoke. Chinese officials should be calmly and objectively analyze the current situation and take appropriate action, whether or not foreigners made the same suggestion. Foreigners can not always wrong.

China should not be so sensitive. Usually does not mean criticism against China, despite awareness of China's often the case. Rather, it is the economic achievements China has made great price. China has moved from a member of the international community insignificant, become an important part of the world economy. China has done a lot of people the world has an impact, which naturally aroused interest and concern. Foreigners do not always like everything they see, especially when the interests they consider themselves damaged. They will express their criticisms and suggestions, requirements change, this is understandable.

China is not the first state encountered this phenomenon. Over the past half century, Japan's economy grew larger, due to much greater international attention than China. Is also the case in Japan, foreigners do not always like what they saw, will complain. This concern, including the critical attention, can be seen as the cost of economic success.

author Richard Cooper (Richard Cooper) is professor of economics at Harvard University, former chairman of the Boston Federal Reserve