McKinnon: RMB Reval Will Accomplish Nothing

♠ Posted by Emmanuel in at 6/07/2010 12:00:00 AM
To give credit to economists, they come up with all sorts of explanations to keep things lively regarding the titular subject matter of renminbi revaluation. That is, "Does pressuring China make them more likely to revalue?" is a secondary question to "Does RMB revaluation actually do anything to cure the ailments of the global economy?" Sometime ago we had someone explain that RMB revaluation will actually cause a loss of US jobs given how tightly intertwined production chains have become between China and the US. Now, Stanford U's venerable Ronald McKinnon argues that the revaluation of the RMB will not, on a global macroeconomic level, necessarily do anything to sort out global economic imbalances without accompanying structural changes in the economies of the respective protagonists [antagonists?]. This theme may be somewhat well-trodden already, but his explanation is particularly elegant.

In the conclusion, he gives three plans of action for the short, medium, and long term:
In the short term (and possibly forever), foreigners should stop bashing China on the exchange rate. A credibly stable exchange rate would eliminate hot money inflows into China and make it much easier for the PBC to continue with its huge domestic credit expansion, which has made China the leading force in global economic recovery.

In the medium term, better balance net saving in the US and China. The US should cut back on its huge fiscal deficits and constrain private consumption while China continues stimulating private consumption. With trade better balanced, American manufacturing could recover and protectionist pressures would lessen.

In the long term, China should continue to encourage the ‘internationalisation’ of the RMB. With a stable yuan/dollar rate, foreigners would be more willing to borrow in RMB from Chinese banks and even be willing to issue RMB-denominated bonds in Shanghai. By gradually escaping from its internal currency mismatch, China would be well on the road to becoming a ‘mature’ international creditor.
Is he correct? Beats me, pal. If I knew the answer to that, I'd probably a very wise and wealthy man by now.