2009-12-09
It seems quite apparent that the Chinese currency now seems clearly undervalued. It is evident from the still rapidly growing foreign exchange reserves, which now amounts to 2300 billion U.S. dollars.
This accumulation of global money is not only a rising risk to the U.S. deficit financing - but also for the domestic Chinese economy by unnecessarily money stock growth and persistent risk of unpleasant rising asset prices (both for equities and real estate/rentals).
The too weak Chinese currency also dampens the Chinese industry's transformational pressure, which can be negative for China in the long run. To keep up with the export companies with an undervalued currency could only be a short term solution.
During the transition phase of the variable exchange rate policy a few years ago, the official press release contained the wording that this policy change was to "further strengthen the managed floating exchange rate regime based on market supply and demand".
Unfortunately, however, China´s foreign exchange policy lacks any market economy approach in regards to supply and demand. The Central bank instead prefers to heavily intervene in currency markets to keep the RMB- rate down.
Fundamentally, foreign exchange policy should be a national matter. Each country should decide its own exchange policy regime. It worked well, as long as China was a minor player in the global world. Nowadays, however, China appears to be an economic Great Power.
Thus, China also have a practical responsibility for the global economy and also for the reduction of the maximum imbalance, namely the excessive Chinese funding of America's dramatically growing international debt trap.