Hi Mike, on the contrary, most modern international economics literature clearly indicate that a nation can rarely gain competitiveness in the long-run through currency devaluation. In the short-run, there might be additional stimulus for export and improvement in the current account (which China does not need anyways, with all the foreign reserves), but inflation will quickly wipe out all the price competitiveness gained through devaluation. Even that is only assuming a static environment. What makes you think that other Southeast Asian countries would not devaluate their currency in response to a RMB devaluation. Then you are back to square one. This could be a vicious cycle if China starts the devaluation process. I am quite sure that China is advanced to the stage of having capable economists who understand the dynamics of currency devaluation and competitiveness of nations.
With a growing trade surplus (although year to year growth is slowing), and additional foreign direct investment pouring into the country, China should focus on developing key industries and infrastructure to improve its competitiveness over Southeast Asian countries. This will be a sustainable advantage, compared to the short-lived effects of a currency devaluation
Also do not underestimate the political will of China. Premier Zhu has clearly stated at his premier speech that RMB will not devaluate during his premiership (3 years). It would be a major political disaster if China devaluates its currency after Zhu's pledge.
So as you can see, both the underlying political as well as economic drivers are clearly favoring a stable currency, I simply can't see how the RMB will devaluate in the near term. It is only the wishful thinking of those hedge managers.
Would love to hear any feedback from you.
William |
