YaleGlobal on 12th May 2010.
Here are a few excerpts:
Revaluation of the renminbi will simply result in a shift of manufacturing among emerging markets, leaving the US with a somewhat smaller trade deficit, higher prices for imported goods and higher interest rates, but not necessarily higher levels of employment. Neither is it likely to increase domestic Chinese consumer spending that the world wants to see. China’s domestic spending will rise only when the government releases its hold on the economy and households receive a larger share of GDP.
Even if the renminbi were to appreciate by 50 percent, raising Chinese labor costs to 10 times
less than those in the US, manufacturing would still not return to America.At most, US retailers
would source not from China but from other emerging economies. Revaluing the renminbi won’t affect America’s trade deficit or employment as wished for.
Reasons often mentioned for the challenges in boosting private consumption in China include people hanging on to their savings in the absence of an adequate social safety net and the lack of
sufficient financial products to insure against future uncertainty. Depressed interest rates for
bank deposits, a means of subsidizing the state sector, amount to a transfer of income out of
households, which also negatively affects private consumption. But more fundamentally, private
consumption has failed to grow in pace with China’s GDP, because the Chinese economy is still largely state-owned and because government taxation is, in the absence of functioning democratic institutions – taxation without representation – virtually unchecked.
State ownership is a major factor depressing private consumption growth in China, because it
prevents households from directly benefiting from land-value appreciation, enterprise profits and capital gains. One might think that state ownership benefits all and that the SOE profits and
state-asset appreciation serve to reduce or eliminate taxation on citizens’ income.
State ownership and control of resources in the past allowed China to industrialize fast. But now
state control is a fundamental obstacle to desired structural transformation: As it acts to depress China’s private-consumption growth, it is also partly responsible for the global imbalances. Therefore, while a revalued renminbi can superficially adjust the international trade structure, privatizing state-owned assets and greater say for taxpayers in government budgeting and fiscal policy can ignite a fundamental correction process in China that would also benefit the global economy.