The standard story line of the controversy over China's exchange rate pits a unified Chinese leadership defending China's economic growth rate against foreign governments who are demanding that China play fair and stop manipulating their currency at the expense of the rest of the world. Yes, that is how the fight is playing out on TV and in government press releases. But the reality is that both the US and Chinese governments are being subjected to immense pressure from domestic interest groups, and their official positions reflect the views of those groups and not necessarily the national interest. That seems like a no-brainer in the American context, but it's also true in the Chinese case -- and even on an issue as critical as this one.
How do we know China's leadership is feeling the pressure? Not by reading the American media coverage of China, which makes it sound as if Beijing is at liberty to do whatever it wants as long as the US doesn't go nuclear with sanctions. But luckily, Victor Shih, one of our country's foremost authorities on Chinese policymaking, has written an incredible paper with one of his former students, David Steinberg, now a postdoc at UPenn, on the power of China's export lobby. They document how over the past 15-20 years Chinese exporters have mobilized to lobby their local governments and central government agencies to keep the RMB from appreciating, or at least rising too quickly. In periods when the RMB did appreciate, exporters were given other benefits -- access to cheap credit and expanded domestic consumption -- as compensation. Since the summer of 2008, Shih and Steinberg report, Beijing has been getting an earful from exporters and their local government backers. Hence, Beijing's reticence to cave.
Unfortunately, I cannot provide a copy of their paper, but feel free to contact Victor at firstname.lastname@example.org.
Another sign of the pressure is a New Peoples Net (新民网) story from last week. Trade associations affiliated with the the Ministry of Commerce (MOFCOM) just completed "stress tests" (人民币压力测试) of manufacturers that show profits will dive off a cliff with any appreciation. Makers of home appliances, autos, and cell phones found that only a 3% appreciation in the RMB would drive down their profits a whopping 50%! Textile producers are in somewhat better, but still precarious shape -- a 1%-point appreciation would cause a 1% drop in profits.
Reports like these do not reflect MOFCOM's independent opinion but rather the exporters' views aired through a MOFCOM mouthpiece.
If you want to know when Beijing will be ready to relent and allow the RMB to appreciate, the initial signs will come with the announcement of other compensatory policies that benefit exporters and help them find alternative -- domestic -- markets for their goods. Look for new subsidy programs, even higher VAT rebates, even lower interest loans, and weaker enforcement of the costly labor contract law.