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.
| |$US _billions_|
|*United States* |10,914|
|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’)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.