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Monday, November 16, 2009

IMF: China Needs Stronger Currency

by Calculated Risk on 11/16/2009 12:13:00 AM

From Reuters: Stronger Yuan Needed for Global Rebalancing: IMF Chief

IMF Managing Director Dominique Strauss-Kahn said ... [China needs to increase emphasis on domestic demand], especially private consumption ...

"A stronger currency is part of the package of necessary reforms," he said. "Allowing the renminbi (yuan) and other Asian currencies to rise would help increase the purchasing power of households, raise the labour share of income, and provide the right incentives to reorient investment."
And from Paul Krugman: World Out of Balance
... Looking forward, we can expect to see both China’s trade surplus and America’s trade deficit surge.

That, at any rate, is the argument made in a new paper by Richard Baldwin and Daria Taglioni of the Graduate Institute, Geneva. As they note, trade imbalances, both China’s surplus and America’s deficit, have recently been much smaller than they were a few years ago. But, they argue, “these global imbalance improvements are mostly illusory — the transitory side effect of the greatest trade collapse the world has ever seen.”
But with the financial crisis abating, this process is going into reverse. Last week’s U.S. trade report showed a sharp increase in the trade deficit between August and September. And there will be many more reports along those lines.

So picture this: month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers. If I were the Chinese government, I’d be really worried about that prospect.
This is something I need to think about. The U.S. trade deficit has been closely correlated to Mortgage Equity Withdrawal (MEW, aka "Home ATM"), and I doubt MEW is coming back soon, so I'm not sure we will see a huge increase in the deficit this time (excluding China and oil exporting companies). So this might impact other countries (like Europe) more than the U.S.