Krugman is just a national treasure. Note how he lays everything out so clearly, with the obligatory language for domestic consumption:
China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.
But then shifts to a blameless explanation of the situation:
The value of China’s currency, unlike, say, the value of the British pound, isn’t determined by supply and demand. Instead, Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market — a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country.
….
There’s nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. In fact, the system served China well during the Asian financial crisis of the late 1990s. The crucial question, however, is whether the target value of the yuan is reasonable.
…..
Until around 2001, you could argue that it was: China’s overall trade position wasn’t too far out of balance. From then onward, however, the policy of keeping the yuan-dollar rate fixed came to look increasingly bizarre. First of all, the dollar slid in value, especially against the euro, so that by keeping the yuan/dollar rate fixed, Chinese officials were, in effect, devaluing their currency against everyone else’s. Meanwhile, productivity in China’s export industries soared; combined with the de facto devaluation, this made Chinese goods extremely cheap on world markets.
Fallows has mentioned, obliquely, that China has artificially lowered the wages of its workforce. This was a brilliant strategy at the time, as it attracted foreign capital, but obviously poses long-term problems.
However, it is my understanding that Beijing has long been alarmed at the real weakness of the dollar, with active debates back in Q408, (many were doubtless shocked, as we all were, by the deterioration of the US economy and trust in the dollar over the long term) and now with increasing moves away from the dollar.
The RMB was put under a basket of goods some time ago, no? Back in April this year I believe? Back in October 08, the US government just had to hope and pray that China would continue to buy dollars. I will never forget what the Republicans did to the US economy. So this has been a weening process, to be perfectly honest. Sad, really.
Inflation in China is a serious issue, with housing inflation at unsustainable levels. The factories in Guangdong that employ Hunan, Jiangxi and Fujian immigrant labor are silent. This is another even more serious problem, and the export market isn’t going to come back as before. No sense in serving that market.
All in all, I think Beijing may well be happy to see this column. The RMB will appreciate because fundamentals in China are quite good.
Political cover, on the other hand, is (usually) spotty at best.
Well done, Mr. Krugman.
Good to see you posting.
Thanks, wish I could slide by your place, but typepad is just too full of subversive elements (present company excepted, of course) to possibly be unblocked.