Friday, January 01, 2010

This and That: Chinese Currency Devaluation

Krugman urges Chinese government to quickly abandon its artificial currency devaluation:

[...] there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply.

The bottom line is that Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation. So I’d urge China’s government to reconsider its stubbornness. Otherwise, the very mild protectionism it’s currently complaining about will be the start of something much bigger.

But putting American interest aside, let us briefly consider the effect of Chinese currency revaluation on Mongolia. Obviously, all the products we buy from China will immediately become more expensive to us. By the same token, it would also give us incentive to produce all those products in Mongolia - especially garments, which would decrease our unemployment level. Not a bad thing for a country that doesn't produce much. However, on the large scale, our economy would suffer significantly, for we earn most of our income through exporting mineral deposits to China. If Chinese economic growth slows down due to currency revaluation, the demand for our mineral deposits would fall accordingly. Needless to say this is a serious threat to our economic development - as we've briefly reminded of this imminent danger throughout last year.

What's most alarming about Krugman's article is the point that China may inevitably face currency revaluation. Not because China's sympathy to the world - especially to the US - but because of growing protectionism against China, which would eventually force them to devalue their currency anyway. But one thing that really interests me right at this moment is whether our government is anticipating this kind of outcome. If yes, what kind of exit strategy are they envisioning?

Addendum: Time Magazine Person of the Year #3 + The Year's Biggest Ideas in Economics
Song of the Day: Beth Rowley - "You've Got Me Wrapped Around Your Little Finger"


tsatsrala said...

Our “sur javkhlant” government may be thinking like if China revalues its currency, it would costs less to buy minerals from us, so they wouldn’t stop buying. Hopefully! :P Or if China suffers that much and doesn’t need to buy, what are we gonna do?! Finding other potential buyers under any option or begging money from others or if we really get in trouble, Mongol Bank has plan, you know:P