China revaluation good for Australian trade

China’s deci­sion to adopt a man­aged float of the ren­min­bi and to mar­gin­al­ly reval­ue the cur­ren­cy imme­di­ate­ly will mean China’s export growth should slow and it’s imports kick-up a tick. This can only be good news for our bilat­er­al trade bal­ance. But the biggest rea­son that the float is good­for Aus­tralia is that the exter­nal accounts of the econ­o­my with the sec­ond largest pur­chas­ing pow­er in the world will now be slight­ly more respon­sive to the mar­ket and more close­ly in line with the val­ue the world places on China’s eco­nom­ic capac­i­ty There will undoubt­ed­ly be a lot of tri­umphal­ist claims from the West­ern side of the Pacif­ic that U.S. pres­sure has forced Chi­na to reduce it’s “com­pet­i­tive manip­u­la­tion” of the exchange rate or that Chi­na has not gone far enough. In fact the evi­dence for a sim­ple com­pet­i­tive­ness motive was not all that strong.  As Ian Mac­far­lane, the Reserve Bank gov­er­nor, argued in a close­ly rea­soned “speech”:http://www.rba.gov.au/Speeches/2005/sp_gov_120505.html in Bei­jing in May, China’s cur­rent account sur­plus has been a phe­nom­e­non of the past five years. It has grown rapid­ly since the end of the 1990s but less rapid­ly than the sur­plus­es of oth­er East Asian coun­tries. The late emer­gence of the big East Asian sur­plus­es points to some­thing oth­er than com­pet­i­tive­ness as a fac­tor in exchange poli­cies; oth­er­wise Chi­na would have adopt­ed it before 2000. Read Macfarlane’s speech to see what that was. But a rigid­ly pegged exchange rate com­bined with very high rates of domes­tic growth and the up-slope of the cur­rent glob­al busi­ness cycle posed huge prob­lems for Chi­nese mon­e­tary author­i­ties and for eco­nom­ic man­age­ment that seem cer­tain to defeat ster­il­iza­tion poli­cies, as Mac­far­lane argues clev­er­ly using Australia’s expe­ri­ence in the 1970s and 1980s. The best rea­son for China’s move is the man­age­ment of these domes­tic pres­sures.

|*Economy*|*GNI PPP basis 2003*|
| |$US _billions_|
|*Unit­ed States* |10,914|
|*Chi­na* |6,435|
|Japan |3,641|
|*India* |3,068|
|Ger­many |2,267| Source: World Devel­op­ment Report, 2005

China’s cur­rent account sur­plus seems unlike­ly to dis­ap­pear on the basis of this “mod­est float”:http://www.economist.com/agenda/displayStory.cfm?story_id=4199196. We’re like­ly to see a much more grad­ual change. This move has to be seen as anoth­er step in man­ag­ing the defla­tion of China’s domes­tic growth rates. Giv­en the extra­or­di­nar­i­ly high lev­els of “inward pro­cess­ing in China’s trade”:http://www.inquit.com/article/436/chinese-trade-growth-in-historical-regional-context, the most impor­tant impact of the reval­u­a­tion is not that it cuts China’s import bill by a small amount, but that it puts a slight­ly high­er price on the val­ue of labor, know-how, land and cap­i­tal in the trade­ables sec­tor of China’s econ­o­my. Seen in this way, it’s appar­ent that the author­i­ties are only catch­ing up with the val­ues that the mar­ket has been pre­pared to attach to these things for some years. The change means that our exports of goods and ser­vices will tend to be more afford­able in Chi­na and the rapid growth in their share of Aus­tralian imports pos­si­bly a lit­tle weak­er. But the effects should be slight giv­en the degree of con­trol that will appar­ent­ly be exer­cised over the float (3 per­cent dai­ly vari­a­tions in the cur­ren­cy ‘basket&#8217)and, although real, the price impacts will be over­whelmed by oth­er fac­tors for most of Australia’s exports to Chi­na. Our exports of com­modi­ties are priced in glob­al mar­kets where Chi­na plays a big role but where it’s the growth of the glob­al econ­o­my—not just Chi­nese imports—that is the most sig­nif­i­cant fac­tor. Here again, I could not do bet­ter than to refer you to the “Reserve Bank’s analysis”:http://www.rba.gov.au/Speeches/2005/sp_gov_140605.html of the fac­tors that real­ly deter­mine Australia’s trade prospects. Incidentally—in case you’re won­der­ing why I use the word ‘ren­min­bi’ instead of ‘yuan’—see the expla­na­tion of the three denom­i­na­tions of the Chi­nese cur­ren­cy on “Wikipedia”:http://en.wikipedia.org/wiki/Renminbi.

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