Urging China to adjust its yuan policy is unlikely to have much of an effect on a nation, which like America, tends to hate being forced by other countries to make decisions.
China has its own economy to worry about, which while fast-growing is still highly unstable due to the political need to maintain high employment for its rural masses moving into the cities.
Thus economic sanctions via new trade barriers would only make a yuan-dollar adjustment less likely:
In the short term, the biggest factor governing appreciation in the yuan is the strength of the Chinese economy (see Michael Pettis on this). When growth looks secure and inflation is roaring ahead, China appreciates. When China is worried, it doesn’t. So if America wants China to appreciate, putting Chinese growth at risk would seem to be a counterproductive solution.
Yet hope is not lost. Free Exchange believes there’s a very simple weapon America has in its arsenal, one which isn’t appreciated for the effects it can have on China — the printing press:
Finally, America has a whopping big alternative to both negotiations and trade war available to it—one which happens to be win-win. That is: pursue adequate fiscal and monetary stimulus. At the present nominal exchange rate, expansionary monetary policy in America would prove highly inflationary in China, which is a darn good reason for everyone in China (including those pesky exporters) to favour appreciation. And adequate stimulus would boost the global economic outlook, which would boost the Chinese economic outlook, and as explained above an improved Chinese outlook is the key factor in generating rapid appreciation.
Might America be able to kill two birds here? It could support its recovery while increasing inflationary pressure in China. Instead of urging (begging) China to adjust the yuan, it could simple shut up and turn on the printing press, allowing the resultant inflationary pressure in China to do the persuading. Even if you’re not quite sold yet on the idea, you have to admit it’s an interesting angle — American stimulus as tool to force a yuan revaluation.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.