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Wednesday, September 29, 2004

So, there was a brief discussion on the renewed pressure for the RMB to revaluate. Someone said that revaluation is unlikely because the effect of the macroeconomic policies recently is still unclear. Someone else made the point that revaluation is deflationary (since it slows the flow of hot money into China), which would be undesirable at the moment due to increasing deflationary pressure in the economy. These are both very good points. I only add a related point:

In addition to the good reasons listed already, I think the new administration's "left" leaning orientation might compelthem to stay on the current course. Despite talk of labor shortage insouthern China, there is still considerable urban unemployment or under-employment problems, as well as problems with rural surplus labor. A sudden revaluation is bound to have some negative consequences on the labor market, which, if we believe in the Hu-Wen rhetorics, would deter the new leadership from revaluating. They would rather have an under-valued currency and let wages rise than the other way around.

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