A crucial issue at the moment is the state of the Chinese currency. Many feel that the Chinese government are manipulating the Currency to keep it undervalued.
To keep the Renminbi undervalued the Chinese are selling their currency and buying dollar assets.
The weaker Renminbi is good for Chinese exporters. It makes Chinese exports more competitive and increases domestic demand. The Chinese authorities are worried about the prospect of unemployment. They feel the need to keep the economy growing quickly to create jobs for the many people leaving rural areas.
However, some economists feel that this manipulation of the currency is effectively an unfair trading practise. The International Monetary Fund expects China to have a 2010 current account surplus of more than $450 billion. It leads to Chinese exports at the expense of US (and countries like UK) exports and output.
In this article, Paul Krugman makes a case for putting tarriffs on Chinese imports in retaliation for their currency manipulation.
In this article, Greg Mankiw makes the case against tarrifs. Arguing protectionist measures would be damaging to the economy.
One issue China will have to face upto is the threat of inflation and unsustainable growth. Faced with inflation, a useful policy would be to raise interest rates and allow the currency to appreciate.
The problem is the more China gets criticised for having a weak currency, the less they want to change their mind. Economic policy is not just driven by economics but realpolitic.
- Why is Chinese currency undervalued?
- Should the Chinese revalue their currency?
- Chinese Economic Bubble