China's currency.

[Rainbow Moonlight]

"Showing appreciation

Another idea being discussed in Chinese policy circles is to allow the renminbi to appreciate against the dollar. Much of China's official foreign reserves have accumulated because the PBC seeks to control the renminbi's exchange rate, keeping its upward movement within a reasonable range and at a measured pace. If it allowed the renminbi to appreciate faster, the PBC would not need to buy large quantities of foreign currencies.

But whether renminbi appreciation will work depends on reducing China's net capital inflows and current-account surplus. International experience suggests that, in the short run, more capital flows into a country when its currency appreciates, and most empirical studies have shown that gradual appreciation has only a limited effect on countries' current-account positions.

If appreciation does not reduce the current-account surplus and capital inflows, then the renminbi's exchange rate is bound to face further upward pressure. That is why some people are advocating that China undertake a one-shot, big-bang appreciation - large enough to defuse expectations of further strengthening and deter inflows of speculative "hot" money. Such a revaluation would also discourage exports and encourage imports, thereby reducing China's chronic trade surplus.

But such a move would be almost suicidal for China's economy. Between 2001 and 2008, export growth accounted for more than 40 per cent of China's overall economic growth. That is, China's annual GDP growth rate would drop by four percentage points if its exports did not grow at all. In addition, a study by the China Centre for Economic Research has found that a 20 per cent appreciation against the dollar would entail a three per cent drop in employment - more than 20m jobs.

There is no short-term cure for China's $3.2tn problem. The government must rely on longer-term measures to mitigate the problem, including internationalisation of the renminbi. Using the renminbi to settle China's international trade accounts would help China escape the United States' beggar-thy-neighbour policy of allowing the dollar's value to fall dramatically against trade rivals.

But China's $3.2tn problem will become a 20tn renminbi problem if China cannot reduce its current-account surplus and fence off capital inflows. There is no escape from the need for domestic structural adjustment.

To achieve this, China must increase domestic consumption's share of GDP. This has already been written into the government's 12th Five-Year Plan. Unfortunately, given high inflation, structural adjustment has been postponed, with efforts to control credit expansion becoming the government's first priority. This enforced investment slowdown is itself increasing China's net savings, ie: the current-account surplus, while constraining the expansion of domestic consumption.

Real appreciation of the renminbi is inevitable so long as Chinese living standards are catching up with US levels. Indeed, the Chinese government cannot hold down inflation while maintaining a stable value for the renminbi. The PBC should target the renminbi's rate of real appreciation, rather than the inflation rate under a stable renminbi. And then the government needs to focus more attention on structural adjustment - the only effective cure for China's $3.2tn headache.

Yao Yang is Director of the China Centre for Economic Research at Peking University."

http://english.aljazeera.net/indepth/op ... 62510.html

A very slow, careful, staged increase in the value of the renminbi may be a good idea- what do you think?

[Shared Puppet]

Yes, until China can get a large enough middle class and overcome the cultural obsession with frugality in order to create a lot of domestic demand as a manufacturing economy she has to remain with a merchantilist strategy of a artificially low currency and buying up debt in her major foreign markets. In the mean time she can leverage that debt to buy up capital assets in those markets and insure commodity supply, as with her attempts to purchase and control more and more of the Australian mining market.