2003 July 15 Tuesday
Stephen Roach Is Wrong About Chinese Currency Float

Morgan Stanley chief economist Stephen Roach argues it is not the fault of China that it is running a huge trade surplus.

A second argument in support of Chinaís currency peg is the nature of the nationís competitive prowess. Contrary to widespread perception, China does not compete on the basis of an undervalued currency. It competes mainly in terms of labor costs, technology, quality control, infrastructure, the improved human capital of its work force, and a passion for and commitment to reform. I honestly believe that if China were to revalue the RMB upward by 10% -- a change I do not expect nor advise -- its exports would suffer minimal loss of market share.

This argument makes no sense. Roach correctly argues that it is foreign investment in China that is responsible for most of the factories that make the surging amounts of goods being exported from China. He thinks that just because foreign rather than domestic investors are responsible for China's surging exports that the Chinese government should not have to respond to demands for a revaluation of the Chinese Renminbi (RMB). But the nationalities of the owners of the capital invested in China are largely irrelevant to whether China should float its currency. Is he going to argue that it is wrong for foreign investors to invest in China since the result is large trade imbalances? I think not. The real issue here is whether changes in currency valuations should be used to balance trade. Well, why shouldn't this mechanism be allowed to work?

He notes, correctly, that the peg of the RMB to the US dollar (USD) is causing the RMB to decline in value along with the USD. But this is contributing to the huge surge in exports from China. Why should one currency, in this case the RMB, be pegged? He blames foreign companies for shifting production to China. But take some other country, fix its currency to the dollar at a rate that makes exports from that country very cheap, and foriegn investors who are assured that the currency peg will be maintained will invest in factories to export from that country.

The only other way to fix trade imbalances is to impose trade barriers. Surely Roach is not advocating that option. Therefore he's essentially arguing for a continuation of large scale trade imbalances that he has argued in other essays are unsustainable.

Share |      By Randall Parker at 2003 July 15 11:01 AM  Economics Political


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