Renminbi revaluation won't trigger a shopping spree

As China’s economy grows, both national income and asset value grow. But the majority of the wealth gain and an increasingly larger share of the national income go to the government coffers, which through SOEs and local governments translates into ever-increasing investments in industry and infrastructure, further expanding the country’s production capacity. At the same time, as households’ share of national income declines, private consumption relative to GDP must go down. This only exacerbates the imbalance between domestic-production capacity and demand, making China more dependent on exports and requiring the renminbi to stay low.

China’s low consumption growth, currency policy and high trade surplus are a result of its political-economic system.

State ownership and control of resources in the past allowed China to industrialise fast. But now state control is a fundamental obstacle to desired structural transformation: As it acts to depress China’s private-consumption growth, it is also partly responsible for the global imbalances. Therefore, while a revalued renminbi can superficially adjust the international trade structure, privatising state-owned assets and greater say for taxpayers in government budgeting and fiscal policy can ignite a fundamental correction process in China that would also benefit the global economy.