China’s Export Competitiveness and the Renminbi

Published on Author savas

In his piece, Michael Pettis urges that China needs to rebalance its economy.  For the past thirty years, China has grown immensely by becoming capital-intensive and export-oriented.  This economy-wide approach is now vulnerable because the global financial crisis has weakened the demand for Chinese exports.  With the uncertainty of international trade in the future, China must look to grow its economy, while trying to reduce its dependence on global trade.  The investment-side of this approach could as lead to problems in the future.  The high levels of investments is generating less growth and more debt.  Experts fear that if this path continues, Chinese debt levels will become unsustainable and will lead to either a debt crisis or a lost decade.  In order to avoid these problems, Pettis explains that China should rebalance its economy from its reliance on investment and exports to consumption.  He gives three mechanisms for doing this: increase the value of the renminbi, raise minimum wages, or raise interest rates.  Raising minimum wages seem to be the mechanism used because increasing the value of the renminbi will affect China’s competitiveness abroad and the government will not want to avoid altering its infant financing system.  Although raising the minimum wage will help rebalance the economy by giving consumers more income to spend, it will take more effort and time for China to become a consumption-driven economy.