The author of this blog has an article at china.org.cn analysing the pattern of China's trade and the exchange rate of China's currency - the RMB. This shows that the view that an increase in the RMB's exchange rate would lead to a shrinking in China's trade surplus, a position put forward by the US administration and others, is factually wrong. That the increase in the RMB's exchange rate after 2004 led to an increase and not a shrinking of China's trade surplus. This is shown in Figure 1 below.
The article examines the reasons for this trend. They are found in the fact that China's exports and imports do not move separately.
China is the world's largest exporter and its imports are in large part an input into its exports. A slowdown in China's exports, due to an increase in the RMB exchange rate, therefore also leads to a slowdown in its imports. But the fact that an increase in the RMB's exchange rate increases the price of China's exports while reducing the relative price of its imports means that as the exchange rate of the RMB went up after 2004 China's trade surplus increased and did not shrink. This evidently has major implications for RMB exchange rate policy within any conceivable band of fluctuation of the RMB's exchange rate.(1)
The conclusions from this are not that the RMBs exchange rate should not increase with time. This will inevitably occur due to the increasing productivity of China's economy. But it shows that any rapid increase in the RMBs exchange rate would be not only damaging to China's exporters but also to other countries.
Readers wishing to look at the issue in greater detail are referred to the full article.
Figure 1
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Notes
1. Evidently extraordinary increase in the RMB's exchange rate can purely abstractly be postulated that would almost bring China's exports to a halt (i.e. demand for China's exports is not infinitely inelastic) and lead to reduction of the the trade surplus via huge simultaneous fall in its exports and imports. Such shifts, which mean a huge slowing of China's economic growth and imports under conditions of world recession would be far more damaging for the world economy than China's trade surplus!
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