By keeping the renminbi's value low relative to the dollar isn't China just subsidizing American consumers especially poor people buying low-cost manufactured items such as those sold in Wal-Mart?
Everyone knows we are getting a wide variety and large volume of products from China. What are the Chinese getting in return? The answer is paper IOUs in the form of U.S. dollars. And what do the Chinese do with these dollars? Do they use them to buy tanks and attack helicopters? No, the answer is that they reinvest those dollars back into the U.S. economy and elsewhere through their sovereign wealth funds. They put the money into U.S. businesses which can then expand to generate more jobs for Americans.
Why then are the Chinese subsidizing American consumers and helping the U.S. by investing in U.S. businesses? Because of structural problems in making the transition from inefficient government businesses to private free-enterprise businesses, the unemployment rate in China is already more than nine percent. Because of the trauma and turmoil of their past Cultural Revolution, the Chinese people and government are afraid of social and political unrest. Since their labor market fluidity is not yet adequate to overcome their structural problems, they cannot maximize employment through fiscal and monetary instruments alone. Consequently, they are willing to subsidize American consumers in order to maintain maximum employment in their country. In addition, the structural problems they face have generated inflationary pressure, which is already too strong. They send the dollars back to the U.S. to avoid adding to this inflationary pressure.
We should not criticize the Chinese government for intervening in renminbi-dollar exchange markets to buy up U.S. dollars. They have bolstered the U.S. dollar at the expense of their own currency. However, this has become increasingly difficult. Continual internal budget deficits in the U.S. have contributed to the U.S. dollar falling in value in world currency markets. As their incomes rise, China’s own consumers gain greater market power. They are beginning to provide sufficient internal demand to help sustain employment and higher real wages in China. This virtuous circle should continue to strengthen China’s economy internally and reduce the need for China to artificially undervalue their renminbi.
China’s development has contrasted sharply with India’s. India’s democracy has moved more cautiously than China in pushing through improvements in roads, railroads, bridges, tunnels, ports and airports. China has outlined even bolder infrastructure enhancements for the future including nineteen new regional airports. This is particularly important for China since its trade is based more on physical commodities. India has the advantage of having chosen English as their main commercial language rather than one of their thirteen primary regional or tribal languages. Since many educated Indians speak English, they have had an advantage in the off-shoring of services such as telephone answering services from the U.S.
From their own history as well as world history, the Chinese communist party has learned the danger of a one-man-rule personality cult. After the horrors of their Cultural Revolution they changed their system to provide for the regular replacement of their leadership. As incomes, education and communications grow in China, we can hope for a peaceful, more democratic China in years ahead. China has suffered some growing pains in establishing health and safety standards for its products. The Chinese leadership is clearly very concerned about these problems and determined to enforce higher standards for both internal consumption and exports.