China Vs. China

In the department of "Be Careful What You Wish For," the hope that China will revalue its currency is an economic idea that has pride of place. Every time policy makers look at the trade deficit and the dreary numbers on the "jobless recovery," the word goes up that China's currency is undervalued and crippling American exports. It may be, but the long term results of a revaluation won't be what advocates hope.

Some of the biggest fans of Chinese currency revaluation are in China. For both economic and nationalistic reasons, many folks there would like nothing more than for their country to revalue the currency, stop hoarding US Treasury bonds, and ideally let the remnimbi replace the dollar as the world's reserve currency. I wrote a few months ago that this wasn't likely to happen. But that's not for lack of trying by US lawmakers. As Niall Ferguson has cogently argued, the effects of a remnimbi revaluation would be disastrous to the US; unless we manage to reduce our government deficit, the cost of China no longer subsidizing our borrowing will be far greater than the job and export rewards. That revaluation may indeed cause the movement of some industry out of China--likely to even lower cost havens. But it will undoubtedly wreak havoc on US borrowing. Some of the lawmakers pushing for that revaluation may well know this. But having failed to deliver jobs at home, they will continue to hammer on China for stealing US jobs with its undervalued currency while keeping their fingers crossed that they won't have to deal with the fallout of this actually happening.