China's Exchange Rate and International Adjustment in Wages, Prices, and Interest Rates: Japan Deja Vu?
38 Pages Posted: 31 May 2006
Date Written: My 2006
China keeps its exchange rate tightly fixed to the dollar. Its productivity growth and trade surplus have been high, and it continues to accumulate large dollar reserves. Many observers take this as evidence that the renminbi is undervalued and should be appreciated to reduce the Chinese trade surplus. We argue that an appreciation of the renminbi need not reduce China's trade surplus but could cause serious deflation in China. To show this, we consider international adjustment between China and the United States from both an asset-market and a labor-market perspective, and compare this to Japan's unsuccessful appreciation of the yen.
Keywords: China, exchange rate, adjustment, assets markets, labour markets
JEL Classification: F15, F31, F33
Suggested Citation: Suggested Citation