Stephen Roach... certainly believes that the big US external deficit is a problem. He just doesn’t think the RMB/ $ has much to do with the US external deficit, or with China’s surplus.
Roach’s argument is that the US would save too little (and China too much) no matter what the RMB/ $.
Perhaps. But it sure seems to me that the availability of easy financing from the Chinese central bank (and a host of oil investment funds) is one reason why the US saves so little. Roach views the US savings deficit as a product of US policies alone, I don’t...
All in all, I see far stronger links between China’s currency policy and low US savings than Roach does. I don’t think the US would be saving as little without a credit line from the PBoC. And it sure seems that China’s savings boom is correlated with its export boom, even if the channels linking a rise in China's trade surplus to a rise in Chinese savings are a bit more murky than the channels linking Chinese reserve growth to low US savings.
... A stronger RMB is not all that is needed to bring about a more balanced world. China does need to do more to stimulate internal consumption, and the US does need to do more slow the pace of demand growth (i.e. raise savings).
Not going to happen just yet. From Reuters, via China Daily:
China's Ministry of Finance said on Monday it would issue the country's first ever savings bonds, worth up to 15 billion yuan (US$1.9 billion), offering Chinese citizens a new investment option.
The tax-free three-year bonds, to be sold from July 1 to 15, would bear an annual coupon of 3.14 percent, the ministry said in a statement published on its Web site (www.mof.gov.cn).
The coupon compares with 3.24 percent for three-year fixed yuan deposits, but interest from the savings bonds is not subject to the 20 percent income tax for bank savings.
The non-tradable bonds would be sold through a pilot computer system linking big commercial banks to allow individuals to purchase, manage and redeem the forthcoming savings bonds electronically, the ministry said.
That will help in the long-run, as the web of existing capital controls is dismantled...
But they are largely forbidden from investing outside China, and their domestic options are limited to savings accounts and stock, bond and real estate purchases.
... but it doesn't exactly sound like a pro-consumption policy. And here is an sometimes under-appreciated reason Chinese saving rates are so high:
Chinese citizens hold $1.8 trillion yuan in bank deposits, due in part to an underdeveloped social welfare system that pushes many to save for medical care and old age.
That one is not going to be fixed by capital-market and currency reform alone. As for RMB revaluation, feel free to take a breath. From Bloomberg:
China's yuan fell after central bank Governor Zhou Xiaochuan said the nation will move "gradually'' to make the currency more flexible, disappointing some investors expecting greater gains to help slow the economy...
"We can be reasonably safe to assume that the pace of appreciation is going to be very, very gradual and it's probably going to be the scenario for next year,'' said Jan Lambregts, head of research at Rabobank Groep in Singapore. "China may feel like it's gotten away with it so far, so it's going to keep a very gradual track.'
All of which explains why Chinese trade surpluses aren't going away any time soon.