Washington has options to strengthen renminbi
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Foreign Exchange

Washington has options to strengthen renminbi

The US could unilaterally move to raise the value of the renminbi, according to a new paper from the Centre for Economic and Policy Research (CEPR), the Washington-based think tank.

Dean Baker, an economist at CEPR, advocates that the US should cut its trade deficit to boost jobs and that the shortfall would be eliminated if the real value of the dollar could be reduced by 10%. He says if Washington is prepared to pursue a policy of lowering the value of the dollar against currencies, such as the renminbi, that are pegged against it, there are at least three routes it can pursue.

First, it could penalize the dollar holdings of countries, such as China, which are buying up dollar assets to prop up the value of the dollar against their currencies.

Second, the US could intervene in the futures market, with the US Treasury and the Federal Reserve buying large volumes of renminbi futures.

Baker says if the futures price substantially exceeds that in the spot market, then holders of renminbi would be reluctant to exchange them for dollars at the current rate and have an enormous incentive to find ways to sell them instead on the futures market, where they could make a guaranteed profit.

“This might lead them to violate China’s laws on capital flows, but given the potential for enormous gains, it is likely that many people with access to large amounts of renminbi would take advantage of this opportunity and evade the law,” says Baker.

“A large enough volume of purchases of futures should raise the renminbi to whatever level is desired.”

The third way the US could raise the value of the renminbi is similar, with the US announcing it will buy the currency at a level above that being maintained by China. Again, this would encourage investors to circumvent China’s restrictions.

Of course, all three paths are confrontational.

Baker says ideally Washington would avoid resorting to these measures and instead negotiate a path to a lower-valued dollar.

“This would inevitably require concessions in other areas where there are conflicts with China’s government,” he says.

“If the US government was committed to lowering the value of the dollar against the RMB, it likely could be accomplished through negotiations, but it is wrong to imagine that the US has no options to unilaterally lower the value of the dollar.”

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