Why China Should Revalue the Renminbi—And Why It Can’t Easily Do So

Michael Pettis

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In a recent piece for the Financial Times, Gerard Lyons, a British economist who sits on the board of the Bank of China (UK), argued that China’s currency, the renminbi, is undervalued, and that by encouraging it to appreciate, 

China would help raise its international profile. While many analysts have made similar arguments, it is not at all clear that a rising renminbi would indeed increase its international role. Even though the renminbi rose steadily in the decade after July 2009, 

Its international role during that time barely rose. In fact, it declined relative to the sharp rise in China’s share of global GDP and global trade.

There are nonetheless very good economic reasons for China to revalue its currency, along with reasons why a serious revaluation is likely to be difficult. In any economy, an appreciating currency effectively subsidizes consumption by reducing the price of imports,

while taxing production by making production of tradable goods less competitive globally. With its persistent excess production and under-consumption, a revalued renminbi would help correct some of the deep structural distortions in the Chinese economy by shifting the distribution of total domestic income from businesses to households.