The recent meeting between China and the US was used as an opportunity to put pressure on China to allow their currency to revalue upwards. The theory is that this will lower the US-China trade deficit, and reduce the US political pressure to impose trade sanctions against China. This is mostly incorrect, and this pressure will not be effective. Indeed, the trade surplus with the US is a by-product of the Chinese currency policy.
If the renminbi were to float upwards there would be some reduction in demand for Chinese-manufactured products, but the cost differential between the US and China is so large that I doubt that this would be significant. Certainly, US goods imported in China would become relatively less expensive. However, the flood of Chinese imports into the US would continue, since there would still be nowhere else that produces a comparable range of products. Since prices would now be higher the deficit could potentially go up.
The Chinese government wants to keep the renminbi low for other reasons. The exchange rate has a big impact on the return on foreign direct investment into China. If a company has made an investment at one currency rate, an uptick in that rate reduces the return. More importantly to the Chinese government the number of companies willing to invest in China may fall if the return on future investments goes down. It’s hard to know what proportion of companies investing in China is making money. Given the flood of investment this is surely the majority, but there some definite losers, and a great many may be profitable but marginally so. If the cost of operating a transplanted facility in China increased significantly then the investment cost in dollars or euros would rise and the return would fall. Given that China has 25 million new entrants to the labor force every year, maintaining direct foreign investment is a huge priority, because indigenous industry is probably still incapable of absorbing this number of new employees. Keeping the flow foreign investment intact is much more important to the Chinese government than keeping Washington happy.
