Friday, December 9, 2011

Ridiculous Purchasing-Power Parity

Enforced by U.S., China’s currency yuan is sharply appreciated during the past several years. However, the large trade surplus in China is just an excuse for U.S. to appeal for the appreciation of yuan.

Why China has a large trade surplus while U.S. has a massive trade deficit? It is primarily attributable to different saving rates. In China, people have been used to saving relatively large proportion of their income. Meanwhile, compared with U.S. government, China’s government does not deplete its budget to improve people’s living standard. In other words, U.S. citizens have been enjoying their lives with much more consumption and much higher pension, unemployment insurance, healthcare, and so forth. On the other hand, China’s citizens have sacrificed their current enjoyment and happiness, hoping that their elder lives will be better off. Unfortunately, their “hopes” would become “wishes” because yuan is thrusted to appreciate, resulting in significant cuts in exports and GDP.

Worse yet, the so-called purchasing-power parity only takes into account the inflation rates in countries but ignoring the distinct income standards. According to current goods prices, the purchasing-power parity is basically realized between China and U.S.. However, people in China and in the U.S. earn almost the same number of income with different currency units; that is, Chinese people earn yuan, whereas U.S. people earn dollars that is approximately 6-folds of the value of yuan. Apparently, this purchasing-power parity merely focuses on “absolute equality” rather than “relative equality”. If equality is the reason why U.S. enforces China to appreciate yuan, then it will also become the reason that China should depreciate yuan.

U.S. probably further contends that China has a very high trade surplus. But please do not neglect that it comes from China’s less expansionary fiscal policies. China’s reap from exports is at the expense of its citizens’ short-term benefits. If U.S. government would like to increase its exports, it can either employ its fiscal policies to accumulate savings or utilize its monetary policies to increase its real interest rate.

U.S. should not use the purchasing-power parity as an excuse to ask China to appreciate its currency. How come Chinese people thrift and cannot obtain better lives? How come U.S. squanders and keeps squandering by pressuring China to forgo its harvest?

Judy Wang