A simmering debate among experts over China’s surging trade surplus and how it wields its currency has burst into the open.
Former US Treasury official Brad Setser, whose “China Shock 2.0” thesis has encouraged some EU policymakers to push for Chinese currency appreciation, says the renminbi is now 30-35% undervalued. But a trio of economists, including former IMF Chief Economist Gita Gopinath, insist that appreciation could worsen Chinese deflation and further reduce demand for foreign goods, exacerbating imbalances. Their prescription: Structural reform in China to boost domestic demand.
Setser counters that the world can’t afford to wait, given China could soon be exporting 20 million cars annually — double its current pace — or 1 in 3 autos sold outside the country.