Economists have welcomed a weak dollar thinking that will faciliate American exports and reduce the trade deficit. Those thories have been applied to China as well, as most people blame China's alledgedly underappreciated curreny for its trade surplus.
However, I read a report of the Economist which argued that the link between trade balance and foreign currency actually is not inherent. Currency markets, rightly or wrongly, are blithe about trade imablances.
For example, some of the countries whose currencies have gained most at the dollar's expense, like Britain, Australia and New Zealand, have large external deficits and debts too, Australia's current account shortfall has been more presistent than America's and as a result, its net overseas debt last year was 60% of its GDP, compared with 19% for America. New Zealand's debt ratio is larger still at 90% of GDP. Meanwhile the currency of the world's largest creditor nation, Japan, continue to languish-even against weak dollar.
So I don't know why some people continue to complain against Chinese currency, thinking it is delibately manipulated by the Chinese government to boost exports. But as the above empirical evidence shows, there is no strong correlation between trade balance and foreign currency. I was wondering why some people continue to complain about it.
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In my opinion, the relation between trade balance and foreign currency exists. As the external reflection of domestic price level, it is absolute that exchange rate (therefore, foreign currency) impacts foreign trade. However, I think there is no absolutely negative effect between them. That is to say, undervalued exchange rate doesn’t denote it will benefit trade surplus, vice versa. In the case of China, distorted price of natural resource, labor, and raw materials play a more significant impact on the huge trade surplus.
As to the view that China manipulates currency deliberately, it is not correct totally because great efforts have been made since July 2005 and RMB has appreciated much against USD. However, there is a point that China can’t explain clearly: although the nominal exchange rate has appreciated to a great extent, the real exchange rate hasn’t witnessed an obvious rise and the truth is real exchange rate is more important than nominal exchange rate as far as trade balance is considered.
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