China's Exchange Rate and International Adjustment in Wages, Prices and Interest Rates: Japan Déjà Vu?1

摘要

China's fixed its exchange rate at 8.28 yuan to the dollar from 1994 to July 2005, and has only allowed for a small appreciation since then. China's productivity growth has been very high relative to most other countries: its trade surplus has been rising and it continues to accumulate large dollar exchange reserves. Many observers, including high officials in the US government, take this as per se evidence that the renminbi is undervalued. To balance China's international competitiveness and reduce its trade surplus, they want the renminbi to appreciate much more. This common presumption of renminbi undervaluation is wrong, and its appreciation need not reduce China's trade surplus but would cause serious deflation in China. To show this, we consider international adjustment between China and the US from both an asset market and a labor market perspective, and compare this to Japan's unsuccessful appreciation of the yen from 1971 to 1995. During a time of economic catch-up and rapid financial transformation, fixing the exchange rate is the preferred way of anchoring the domestic price level. (JEL codes: F15, F31, F33)