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02/26/2012

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Ted

Hi, I agree with you that China needs to have certain reform in order for further development. However, I have different opinion on your argument when you say that "Chinese enterprises would be induced to look more to its domestic market if the Renminbi was allowed to float and appreciated a lot relative to the dollar and other currencies." You are assuming that Chinese citizens have the purchase power to the products which are switched back from exportation due to the appreciation of Renminbi. We've seen a lot of small factories being closed because of the weak exportation which indicates that many products being diverted from exportation are not consumed by Chinese domestic market. One of the problem in China now is that many products are sold cheaper abroad than they are in its domestic market. If you have some friends working in China, you would probably know that many Chinese co-workers of theirs may once ask them to bring certain goods back from other countries. Because they are cheaper even those goods are made in China. So the consumption of Chinese citizens would probably not cheered up by simply floating its currency. The additional cost between the factories and the consumers has to be reduced to get the industrial output affordable by Chinese. Otherwise, the reduction of the exportation would only result in the decrease in the output rather than being diverted to its domestic market. One of the other factor is that the inflation of its currency within Chinese market. If you add the fact of rising price in its domestic market to the appreciation of Renminbi to other currencies, the real exchange rates between Renminbi and others are actually going down quickly between one unit of foreign currency buys less Chinese products. If the problem of rising price in China is not curbed, the purchase power of ordinary Chinese citizens will be harmed. Therefore, the output of its industries will hard to find a way to Chinese consumers.

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It's funny how you describe these things like a rosy one. :)

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I don't think the word Rosy is more fitting to describe China's economy.

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