Brave New World - The Paradox of RMB exchange rates

Posted by on December 3rd, 2008 at 08:36pm

karwinlok wrote an interesting post today on
Here’s a quick excerpt
http://blogs.cfr.org/setser/2008/12/03/should-the-currency-of-the-country-with-the-world%e2%80%99s-biggest-external-surplus-and-largest-reserves-depreciate-amind-a-global-slump
I think there is a basic problem here in that the US wants China to do two contradictory things. The US wants China to boost domestic consumption, while at the same time lowering the trade deficit, and absent action by the US, can’t do both.
Either China expands its money supply or it contracts its money supply. If it wants people to spend, then it expands it money supply, but if it expands it money supply the RMB goes down, and you increase the trade deficit. If China contracts the money supply, then you decrease the trade deficit, but you also encourage domestic savings. Without action by the United States, there is just no way of getting to the desired state of affairs.
The basic problem is that anything that China does to encourage China to spend money on Chinese products also encourages Americans to spend money on Chinese products, and there […]

Read the rest of this great post here

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