Where We Stand Today
Whatever the weakness or strength of the case for further immediate additional renminbi appreciation, a sudden move in this direction could very well hurt, not help, the United States - insofar as this led the Chinese to significantly cut back on their purchases of US dollar assets.
Indeed, the US government should almost certainly be hoping that China does not make any major move to pull its funding of the US trade deficit - and instead invest either in other foreign currencies or, indeed, in its own economy. Notwithstanding recent US pressure for immediate freeing of the renminbi exchange rate, and threats of punitive tariffs on Chinese imports, the United States, as the deficit country dependent on Chinese inflows, is arguably the one that is more vulnerable. China, in contrast, appears to be holding the strong hand. Joseph Stiglitz (2005), for example, has argued thatChina could easily make up for the loss of exports to America - and the well-being of its citizens could even be improved - if some of the money it lends to the US was diverted to its own development.
China abandoning exchange rate control entirely and allowing the renminbi to strengthen freely against the US dollar remains unlikely in the short term because it could jeopardize the high rates of economic growth demanded by the Chinese leadership. Pronounced renminbi revaluation would make China’s exports more expensive and likely slow the economy. There are serious political concerns about the unemployment that might be generated by any slowdown. Following the bold initiatives laid out by Jiang Zemin at the 1997 15th Party Congress, the Chinese government has acknowledged the need for ongoing closures of at least some of the country’s loss-making state-owned enterprises. However, in order to ensure that the workers cast out of these state-owned enterprises are able to find new employment, the government finds it hard to accept even a modest reduction in the country’s high rates of overall economic growth.[37] Moreover, bad loans to loss-making state-owned enterprises have contributed to
significant financial sector weakness in the past (see Chapter 7). Continued concerns about China’s banking sector add to the risks associated with restrictive policies and help explain the limited nature of the exchange rate adjustments undertaken in 2005 (Eichengreen, 2005).[38]