Renminbi-Dollar Peg: Not an India Issue

Arguing that the pegging of the renminbi to the dollar hurts the entire world, some analysts have called for the emerging-market economies to join the United States in pressurising China to allow its currency to float.  I argue that these calls rest on very suspect arguments and that India will be ill advised to open yet another India-China controversy.

The demand for the revaluation of the renminbi continues to occupy many in WashingtonDC including the US Congress. In an effort to turn what is wholly a China-US issue into a China versus the rest of the world issue, some analysts have gone on to offer specious arguments in support of the notion that the pegging of the renminbi against the US dollar at the current rate harms not just the United States but also the developing countries. The heads of the central banks of Brazil and India seemed to give a tentative nod to these arguments when they spoke against the peg in late April (2010), ahead of the meeting of finance ministers and heads of central banks of G-20 in WashingtonDC.

Few seem aware that leading scholars including Nobel Laureate Robert Mundell of Columbia, Ronald McKinnon of Stanford and W. Max Corden of Melbourne (Australia) reject the proposition that the renminbi is undervalued even when seen in the China-US context. Many also disagree that the renminbi peg is the primary cause of the US deficits and Chinese surpluses. The more than 18 per cent appreciation of renminbi against the dollar between 2005 and 2008 produced no perceptible effect on the US current account deficit.  It rose from $748.8 billion in 2005 to $803.5 billion in 2006 before declining to $626.6 billion in 2007 but only to rise again to $706.1 billion in 2008.  

Further doubt is cast on the centrality of the renminbi peg when we consider that the United States has been running a current account deficit with more than a hundred countries, including very large ones with Germany and Japan. The combined current account surplus of Germany, Japan, Switzerland and Norway far exceeds the current account surplus of China. If one believes in the primacy of the exchange rate as the explanation of current account imbalances, one would have to call for these countries also to revalue their currencies. Ironically, for now, just the opposite has happened in the case of Euro in the wake of the crisis originating in Greece.

A significant effect of the renminbi-dollar peg on third countries such as Brazil and India is, of course, in much greater doubt because it is based on a logical flaw. Even if the Renminbi is not revalued, these countries can and do adjust their own exchange rates down vis-à-vis the renminbi.  The Reserve Bank of India, for example, has done an excellent job of managing the country’s exchange rate in the context of the country’s fiscal and monetary policies over the years.  The result has been a modest current account deficit in most years, allowing India to absorb some foreign savings without the accumulation of unduly large fore

Equally, as the Indian rupee was devalued vis-à-vis the dollar and therefore the renminbi while renminbi-dollar exchange rate was held fixed, there was no discernible effect of the latter on the export competitiveness of India. Thus, China fixed the renminbi at 8.27 renminbi per dollar beginning in 1997 until July 21, 2005. India’s own annual average of the exchange rate moved from 36.32 rupees per dollar in 1997 to 44.1 rupees per dollar in 2005 with many ups and downs in-between.  The exports-to-GDP ratio grew from 11 to 20.1 per cent during the same period.  This was a faster expansion of exports as compared to any prior 8-year period in India’s history. If the Chinese dollar peg during 1997-2005 had any effect on India, the movement in the rupee’s exchange rate more than neutralized it.

Equally specious is the occasional argument that the recent surge in anti-dumping cases against China by India offers compelling evidence that the renminbi peg was hurting Indian industry. True, India initiated as many as 17 anti-dumping cases against China during July 1, 2008 to June 30, 2009, the latest one-year period for which we have the data. But India initiated anti-dumping cases against all major trading partners during this period. China had the largest number of cases initiated against it for the simple reason that it is by far the largest single source of imports into India. Even the much smaller Thailand was subjected to as many as six anti-dumping cases.  Additionally, with three cases each against South Korea, Malaysia and Indonesia and two against Singapore, India had 17 cases against non-Chinese East and Southeast Asian countries. Few analysts have accused these countries of undervaluing their currencies!

The argument that the surge in anti-dumping by India testifies to rising pressures from renminbi peg is further undercut by the fact that recently anti-dumping has surged everywhere in the world.  Unless the proponents of this argument are being disingenuous, they may be surprised to know that the second largest user of anti-dumping recently has been none other than China (with Argentina tying with it).  During July 1, 2008 to June 30, 2009, it initiated as many as 25 anti-dumping cases. Surely, China could not be reacting to its own undervaluation!  Anti-dumping has surged around the world not because China has pegged renminbi to the dollar but because the global financial crisis has led companies around the world to look for markets in every nook and corner of the world. 

The heart of the imbalance problem lies in the savings-investment gap that renminbi appreciation can influence at best in small measure.  Looking back, until 1976, the United States ran current account surpluses. In the subsequent years, it learned to spend more and save less. As the Chinese living standards rise, one can be sure they too will learn to spend more, spending  more on infrastructure that has lagged behind massive growth, thereby self-destructing their current surpluses. Historical experience shows that global imbalances come and go. In the meantime, third countries have little to gain by going after China other than the latter’s animosity.

Final point: When we already have many other political problems with China, why open yet another front on which we have virtually nothing to gain?

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