Will Low RMB Exchange Rate Cause Imported Inflation in China?
How Low RMB Exchange Rate Becomes Trump's headache?
Someone has been fanning, in this thread, the misinformation that low RMB exchange rate will cause imported inflation in China, and has concluded, in a self-claimed authoritative way, that China is "between a rock of a hard place" because of low Yuan exchange rate, suggesting China is losing the trade war. But this guy knows nothing about economics.
There is no danger of imported inflation in current China no matter how low Yuan rate might go against the Dollar, unless China's economic fundamentals have changed.
US brokerage houses, Goldman Sachs and JP Morgan Chase in particular, have been urging their clients to prepare for a Yuan rate breaking 7, even breaking 8, for quite a while now. You can argue today's Yuan devaluation is a result of profit-driven speculation, or a politics-motivated speculation, or a monetary policy maneuver, or anything else, but no matter what the causes may be, the Yuan devaluation can't cause, and won't cause inflation in China. To have an inflation in China, you have to change China's economic fundamentals, including the mechanism of pricing in China.
To most of economies in the world, imported inflation is a fake topic. You may have an inflation, such as Germany after WWI, or Zimbabwe in the 1990s, but your inflation is unlikely to be an imported one unless (1) your currency is well accepted by foreign countries, so you can import foreign consumer goods and foreign services at your will; and (2) your import is so huge that imported goods and services dictate your domestic prices. Clearly there are only few countries can meet these criteria in history. Germany's high inflation from the 1920s to the 1930s was certainly not caused by importing too much foreign goods. As a defeated country of WWI, Germany had zero hard currencies to buy foreign goods at that time. A similar case happened to Zimbabwe in the 1990s. Its high inflation was caused by low domestic outputs, not high import. As poor as a beggar, what could Zimbabweans use to pay for the foreign goods they intent to buy? Nothing. If the Zimbabweans had nothing to pay for foreign goods, who was going to sell them anything? No one. Then, why is the term of imported inflation so popular in our daily life? Well, I guess this is because people misuse the conception of "imported inflation" for their own convenience.
Right now, there is only one country has the privilege to imported inflation. That's the US. For other economies in the world, sorry guys, you are not qualified to call your inflation an imported inflation because when you lose your own price stability, either you have little good money to buy foreign goods, or foreigners will sell you nothing due to concerns about your credit standing, or both. Without huge amount of foreign goods present in your country, how can you blame foreign goods and services for your inflation? Certainly you can't.
China has the strongest pricing mechanism in the world. China not only is the largest consumer goods producer in the world, but also is the most versatile merchandise producer worldwide. Therefore, China can set its domestic prices using its own products. No matter how much foreign goods China imports, it will always be insignificant in comparison to the huge amount goods produced domestically, thus impossible for imported goods to distort Chinese prices systematically. Most importantly, the Chinese economy is a hybrid one where SOEs control the most important parts of the economy, which sets the tone for prices. As long as the SOEs function normally, there is no way for foreign forces to destabilize China's pricing. No price instability, no inflation. Yuan rate, regardless how it fluctuates, will not change China's domestic pricing.
The good side of low Yuan exchange rate is that it can offset major negative effects brought by high US tariff. The most important reason that China keeps to make so much consumer goods to export even at very low profit margins is to keep migrant workers employed, so that China can continue its urbanization. As long as Chinese goods is price competitive in international markets, Chinese will be employed and Trump's trade war will have little impact to Chinese economy. After the great recession of 2008, China increasingly reviews the dollar is something of the past. Thus, trade surplus with the US is no longer what China chases after. In order to win the trade war against the US, China can even completely ignore the profit margins for the goods exported to the US, as unemployment is the chief casualty of any trade war. Of course China will have to resort to state subsides to the producers in this extreme case. Can the US complain about this practice? No more. If you can subsidize your soybean farmers, why can't I subsidize my appliance producers?
The bad side of low Yuan exchange rate is that it will inevitably discourage the Chinese to spend money outside the border. This will definitely slow down the speed of Yuan internationalization, which is considered as a set back for China's long term goals. This is why the People's Bank of China is unhappy when Yuan rate goes too low.
The ugly side of low Yuan exchange rate is that it encourages market speculation, which potentially causes financial market chaos. This is why the People's Bank of China will intervene when Yuan rate swing too violently. Most people who spread rumors and misinformation about Yuan rate are speculators. This explains why those people shout at highest volume to predict Yuan's next movement, because they are the ones who are most likely to profit from Yuan rate's big swings.
