With pressures building over the past two years, market watchers are speculating that the needed adjustment is much larger than a gradual appreciation of 6 to 7 percent. Still, the government remains adamantly against any major or sudden adjustments and reluctant to embark once again on a gradual appreciation in one direction that would not necessarily solve the problem - and, in fact, could make it worse.
The question remains: if the market determined the value of the renminbi, would it be higher or lower in five years? It is widely believed that the currency would appreciate owing to persistent trade surpluses and China's abundant foreign reserves. But, even with the lack of movement in the renminbi's value, China's competitiveness is already eroding as inflation accelerates, pressures for significant increases in real wages mount, and property values continue to rise. Perhaps the most challenging aspect for the government is the pressure on labor markets as reflected in the highly publicized strikes in southern China, which reflect not so much a shortage of labor per se but more the unwillingness of the newer generation of migrants to relocate when equally attractive opportunities nearer to home are now emerging.
It is also worth noting that most Chinese households and companies find it difficult to move funds abroad given existing capital controls. Many have yet to consider the possibility that owning property in another country could be even more attractive. But with growing sophistication in considering investment alternatives and greater flexibility in transferring funds, the Chinese - like all others with significant assets - will diversify their holdings more quickly by shifting capital abroad. Prudently diversifying assets could mean the renminbi will get weaker rather than stronger over time on a "market basis". Its value in the next few years is anyone's guess - the way it should be.
The writer is a senior associate at the Carnegie Endowment for International Peace and former country director for the World Bank in China. The article first appeared in the Financial Times.
(China Daily 06/22/2010 page9)