POLICY PERVERSITY

While the Chinese yuan is indeed undervalued, it’s not the key to reversing China’s immense trade surpluses, it’s primarily an outcome. China suppresses household consumption and is experiencing collapsing residential property values. That combination creates weak currency. The US runs large budget deficits and has insufficient savings, ergo big trade deficits. Both nations have a bad policy mix. The US needs to save more, China needs to increase domestic spending.