Should China continue to peg the yuan?

One estimate is that China has been spending about $400 billion to prop up stock and currency prices, but with no success.  Might market-determined, flexible prices have some value today?

Cheng-chung Lai and Joshua Jr-Shiang Gau reiterate a well-known point about the 1930s:

It is often argued that the silver standard insulated the Chinese economy from the Great Depression that prevailed in the gold standard countries during the period 1929–1935. Using econometric testing and counterfactual simulations, this article shows that if China had been on the gold standard (or on the gold-exchange standard), the balance of trade of this semiclosed economy would have been ameliorated, but the general price level would have declined significantly. Due to limited statistics, two important variables (GDP and industrial production) are not included in the analysis, but the general argument that the silver standard was a lifeboat to the Chinese economy remains defensible.

China during the Great Depression remains very much an underexplored research topic.  Here is Loren Brandt and Thomas Sargent on China later going off the silver standard.  Here is Milton Friedman on the same (jstor).  The Chinese were not able to sustain that peg either.  So what should the smart money bet on today?

Here is Lars Christensen on the falling apart of the dollar bloc.


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