On October 29 in Vox, an online journal (http://www.voxeu.org/index.php?q=node/675), Shang-Jin Wei, a finance professor at Columbia University’s Graduate School of Business, had an interesting short piece on China’s exchange rate regime.Based on research for a paper he wrote with Menzie Chinn (which I wasn’t able to read), he argues that the benefits of China’s moving to a flexible exchange rate may be exaggerated as far its impact on adjusting global current accounts and China’s domestic macroeconomic balance.He says:
…If one could engineer a real appreciation of the renminbi, it could have some effect on China’s trade or current account balance. Indeed, in a separate research project that I am doing with Caroline Freund and Chang Hong, using China’s bilateral trade data and separating processing from non-processing trade, we find evidence that bilateral trade volume clearly responds to changes in bilateral real exchange rate, especially for non-processing trade.But a more flexible exchange rate does not promise a faster current account adjustment or resolution of global current account imbalances.
If there is to be an adjustment of the currency, and Wei seems to think that on the whole it would benefit China, his conclusion is that a shift to a de facto dollar peg would not slow down the adjustment process (in fact he says “if anything, there is slight, but not very robust evidence that less flexible nominal exchange-rate regimes sometimes exhibit faster real exchange-rate adjustment”) and furthermore, to the extent that the de facto dollar peg constrains the conduct of China’s monetary policy, he argues that it might be a good thing.
Wei is a lot more optimistic than I am about how much room the PBoC currently has for further maneuvering, but I do agree with another of his points, that reserve accumulation can be a very volatile process.He says:“The very high speed of China’s foreign reserve accumulation really took off within the last four years...It may very well be responding to a shift in market expectation on the RMB movement, or at least the reserve accumulation and the exchange rate speculation feed on each other.However, if it took only four years for China’s FX reserve to triple in value, it may take only another four years for it to lose 60% of the value once the exchange rate expectation starts to reverse itself.Economic history books are full of examples of seemingly sudden shifts in market sentiment.”
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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), Shang-Jin Wei, a finance professor at Columbia University’s Graduate School of Business, had an interesting short piece on China’s exchange rate regime.
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December, 2007