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April 17, 2005
Can we lose the constant talk about revaluing the yuan?
Now remember, I still lean to the "soft landing" side of things, though I acknowledge that our current position is not without risk. Raising the level of pressure on China to revalue the yuan increases the risk.
Remember also, that I have said that China will not do anything until it is their time to do so. So it may not surprise you that I think that the talk from Washington is just that. Talk. And talk, as Roubini also says, is cheap. This is the kind of talk that could weaken our credibility if people really sat down and realized that it will likely have no effect on China and, as far as I can tell, is only really intended for domestic consumption.
You see, Brad Setser's comment in this post (the Peoria comment) is right on. I think this probably is a case of a position being taken (on the exchange rate issue) to look like we're doing something to close the trade deficit. There would be a small upside to a revaluation, but the downside is much, much worse for both China and the U.S. if the revaluation is too much, too soon (see Roubini's quote about not biting the hand that feeds you).
And China isn't going to do anything that is not in it's best interest anyway.
A few years ago, it might have been 2002, I was asked when I thought China would begin to relax their exchange controls in a meaningful way and begin to float. At that time, I answered somewhere between 2008 and 2012, and that it would be gradual, perhaps taking that entire range of years to complete. Funny thing is that today I'm less sure. I don't think I have the confidence to give a range like that now. If pressed, my answer would probably be about the same, but with less confidence. There would be something to be said for beginning before the Olympics, but that's really going out on a limb.
Bottom line is that there are still plenty of reasons for China to go slowly, even though we all know where they (and we) want to be in the long run--when they are ready.
And most of the things that need to happen for China to be ready are beyond our control--certainly beyond what we can change with mere words. All other things equal, too much talk could come back to bite us later, regardless of whether China responds to it or not.
Alas, it continues, (Reuters)
BEIJING (Reuters) - U.S. pressure to free up the yuan will be counter-productive to China's planned currency reforms, despite a growing domestic sense of urgency for making such changes, the official China Daily said on Monday."Pressurizing China will be futile, if not even complicating the situation," the newspaper said in a commentary. "Worse, it will distract the United States from attending to the domestic causes of its problems."
UPDATE: Dan Drezner has an interesting take.
Posted by William Polley at April 17, 2005 11:38 PM
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