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A Yen for Growth

March 30, 2012 3 minute Read by Erica Libby

Currency value plays a critical role in the growth of exporting countries. China’s currency policy has been a major source of frustration for the U.S. Analysts and politicians in the U.S. have charged that suppressing the value of the Renminbi has enabled China to maintain accelerated growth at the expense of other major exporters, including the U.S. On March 12, China’s central bank announced that recent trade deficits, particularly the massive trade deficit in February, indicated that China’s currency had reached near equilibrium status. So it’s difficult for the U.S. to continue to blame China for the still struggling American economy. What is clear, however, is that the Renminbi’s value continues to play an important role in the growth of developing nations in the region, such as Vietnam and Cambodia. China’s ability to remain competitive will depend not only on its currency policy but also on its ability to control labor costs and address the issues of a shrinking labor force from rural areas and a transition to consumerism. Costs have risen dramatically for manufacturers in China. A survey by Standard Chartered on March 5 found that wages in China have already risen 10% this year, following 20% surges every year for the last four years. These rising costs threaten China’s competitive advantage and have placed even greater emphasis on the Renminbi and its valuation. A recent study by Aaditya Mattoo, Prachi Mishra, and Arvind Subramanian for VoxEU.org shows that a 10% appreciation in the value of the Renminbi increases the exports of developing countries by an average of 1.5-2%. If the level of competition between China and the developing economy is especially high, then the effect rises to 6%. The implications of this research are great for emerging economies. As a greater portion of the world’s growth is driven by emerging economies, perhaps the best argument against China’s suppressing the Renminbi is the positive effect on growth in developing countries. The positive impact an open market could have on other countries could spur a solution to what has been seen as a problem between the Chinese and U.S. governments. This view must be overcome in order to guarantee that currency control, whether by China or by other governments, is minimized in the future.