China’s currency of opportunity

„The United States and China have a wonderful opportunity to do a deal over the ever-contentious issue of China’s undervalued currency — but will probably blow it. For years, American presidents and congressional leaders have urged a major revaluation of the renminbi (RMB), which contributes to massive Chinese trade surpluses with the United States and the world. Now, China has an independent reason to revalue the RMB: combating inflation.

In the past year, China’s inflation has surged. Consumer prices rose 5.5 percent for the year ending in May, and many economists expect further increases. Chinese leaders fear that higher inflation threatens their power. Indeed, higher inflation helped trigger the 1989 Tiananmen Square protests.

Inflation keeps Chinese policymakers up at night, writes Cornell University economist Eswar Prasad in the Asian Wall Street Journal. It feeds social instability, especially in urban areas where there are already rumblings of discontent at dismal employment prospects and the growing gap between rich and poor. Here are the makings of a deal, because a higher RMB would both dampen China’s inflation and reduce large U.S. trade deficits. China’s exports would become more expensive, its imports cheaper. American exports would become more competitive globally.”