Last week’s Senate bill on Chinese currency intervention predictably enough brought out all the same old arguments about international trade, and just as predictably has hardened the opposing positions in the debate. Unfortunately the difference between a good outcome, intelligently negotiated, and a bad outcome, is pretty large, but with each side hardening its position the likelihood of a good outcome is declining.
The biggest problem with the debate, I think, is the muddled thinking and half-baked arguments that characterize each side. For example many of those who believe China is cheating on trade go through complicated exercises to prove the currency is undervalued and should be sharply revalued.
The currency may well be undervalued, but a significant rise in the RMB, especially if it is countered domestically by an increase in credit at lower real rates, might actually make the global imbalances worse and, more worryingly, cause China’s debt burden and capital misallocation to rise. This would make China’s eventual adjustment far more difficult.
