China to Cease Currency Curtailment?

The lead story in today’s New York Times, “China Seems Set to Loosen Hold on its Currency,” describes the possibility of letting the Chinese currency, the renminbi, rise against the dollar. This will help to curtail the U.S. trade deficit — China currently exports four times as much to the United States as it imports.

The article notes that China is not doing this out of the goodness of its heart towards the U.S. The artificial restraint on their currency is leading to inflation and costing the central bank 9.2 percent of the country’s economic output to maintain it.

Meanwhile, the United States has been meticulous in maintaining its silence about the matter to avoid a reaction against the move through nationalism or a desire to avoid the appearance of buckling to international pressure.

On the other hand, according to the article, a stronger Chinese currency could lead to losses in its labor-intensive industry with low-profit margins such as shoes and textiles. So, the internal debate in China is continuing.

These economic analyses can get very complex, and it seems like every economic move has significant pluses and minuses. But it seems fair to me that the value of a currency should be allowed to fluctuate according to its strength in the open market rather than manipulation by a central government.