Zoo Station

One of the biggest issues between the US and China now is whether the Chinese currency is undervalued. The US insists it is, making imports to the US unfairly cheap. China says it will move at its own pace. The US should also be careful what it wishes for, because as the number two banker of the US debt after Japan, China would not have to buy as many US dollar denominated assets and could lead to a rise in US interest rates, points out the IHT.

Revaluation of a pegged currency like the yuan is quite tough - what to do with currency speculators, and how should it be smoothly instituted? In fact revaluation of the yuan across the board is an extremely blunt change to a specific gripe of "too cheap imports."

The most rational alternative (subscription required) to an all out revaluation comes from Joe Stiglitz (Columbia) and Lawrence Lau (Stanford and Chinese University of Hong Kong) - export tax. Their argument in using a surgically precise tool like a tariff is compelling:

• "One of the advantages of an export tax is that, unlike a revaluation, it would not lead to financial losses for Chinese holders of dollar-denominated assets, such as the People's Bank of China or commercial banks and enterprises. China's central bank currently holds about $640bn in foreign exchange reserves. Assume that only 75 per cent is held in dollar-denominated assets. A renminbi revaluation of 10 per cent would result in a loss of $48bn or about 400bn yuan for the central bank."



• "Another cost of revaluation would be possible further deterioration in the distribution of income, including increasing the already large rural-urban wage gap. Revaluation would put downward pressure on domestic Chinese agricultural prices; an export tax would not."



• "An export tax, by contrast, would have a beneficial side effect: it could generate substantial government revenue for China. Given the high import content of Chinese exports to the US, a 5 per cent export duty would be equivalent to a currency revaluation of some 15-25 per cent, generating about $30bn-$42bn a year."



• "Finally, an export tax would not reward currency speculators. It may even discourage the speculation that has com plicated macro-economic management of China's economy. If potential speculators can be convinced that China would rather impose an export tax than revalue, less "hot money" will flow into China. By contrast, nothing encourages speculators more than a "victory", especially where, as here, it is likely to do little to correct the underlying problems."



• "An export tax can be easily lifted if and when Chinese balance of payments conditions so warrant. It could be stipulated that the tax would be reduced or lifted if the Chinese current account balance turned significantly negative. America's China policy has been driven more by domestic politics than hard economic reasoning or thoughtful, quiet diplomatic initiatives."

This the most refreshing insight so far on the yuan issue. Why has the media not talked to real economists instead of politicians? China bashing is a sport enjoyed by U.S. Democrats and Republicans alike. (There's something special about an issue that both Hillary Clinton and Henry Hyde can agree on.)

But the US cannot ignore the sad reality pointed out by Stiglitz and Lau: "America's defence that it is doing the world a service by consuming vastly beyond its means is self-serving and rings hollow: US fiscal policies and low savings have become the fundamental source of global imbalances."

And that's something that China can only do so much about.