Friday, June 25, 2010

Freaking Out Over China

Krugman's column today makes a little too much of the slowness of China's currency adjustment. I agree that the rise is slower than desirable but the Chinese are also constrained and probably a little worried that too quick of a revaluation will expose problems in their industries. Chinese nationalism also seems to have become tangled up with supporting a weak renminbi which will be hard to back off of. The unrest among workers mentioned in the column also warrants caution by the Chinese, they're already upset over low wages things would get much worse if the currency adjustment leads to layoffs.

On the whole, I agree that China should adjust quicker. However, the Chinese have already shown a pattern of very slow and careful reforms, well, since Mao died anyway. I don't expect them to alter this pattern because of outside pressure. We just don't have any incentives that would be powerful enough to outweigh their perception of risk. Be happy they're moving in the right direction at all, they could be completely intransigent.

[Edit: A link on the reform China really needs, more domestic consumption, less reliance on exports.]

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