Readers Comment (Ralph Musgrave) from Why is Chinese Yuan undervalued
You claim “Chinese growth is dependent on exports” (2nd bullet point). You then argue that a lot of labour is quitting agriculture and state industries. Plus this labour needs jobs, therefore an undervalued currency and a healthy export sector is helpful in creating such jobs.
I suggest an artificially under or over-valued currency is very hard to justify. Instead of boosting employment via exports, China can perfectly well boost employment by boosting internal demand (which is exactly what they have done recently in view of the drop in demand for their exports caused by the credit crunch). The resulting deterioration in their balance of payments shouldn’t be problem in view of their huge balance of payments surplus.
I suggest the above mistake of yours is a classic example of what is sometimes known in economics as targeting “intermediate objectives”. That is, the fundamental objective in economics is maximising income per hour worked (within environmental constraints). Making “employment” or “the balance of payments” an objective, nearly always results in lower incomes for citizens than could be the case. Indeed, under the policy I suggest above, the Chinese would spend more time making stuff for internal consumption rather than for consumption by foreigners, which ought to boost Chinese incomes.
I generally agree. I think we could say ‘Chinese growth has been dependent on exports in the past’. And the Chinese authorities are reluctant to embrace alternatives such as boosting domestic demand. So the Chinese are keeping their currency undervalued to boost exports, but, they could easily place less emphasis on export led growth and boost domestic spending as you suggest.