Ahead of the Chinese president’s state visit to the US last month,
Tim Geithner once again called the renminbi “substantially undervalued”. But he also raised a point often overlooked in this currency dispute. The US Treasury secretary said the renminbi is appreciating at 6 per cent a year in nominal terms but significantly more in real terms because “inflation in China is much higher than in the US”. Taking inflation into account, “the [renminbi] is rising at a rate of about 10 per cent per year”.
Leave aside whether that is the right rate of appreciation. More interesting is the admission that relative rates of inflation affect real exchange rates. Why? Because whereas China’s problem is an
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