One of the most important current issues in international finance is the overvalued Chinese yuan. While there is disagreement on the extent of the overvaluation, there is general agreement that the Chinese currency, by not floating, is affecting the trade and capital flows not only of the United States but now Europe. Unfortunately, this is an issue that will not be easily resolved for the simple reason that a significant change in the currency rate will have a large negative impact on internal growth in China.
The high Chinese economic growth is driven by the strong export business along the coast. High growth expectations with the chance of employment are causing a mass migration from the rural areas to the urban centers. Any slowdown in growth may lead to significant civil unrest from this migration. External pressure on currency reform is not going to solve the migration problem. However, there may be alternative approaches which will help reduce some of the migration pressures.
Land reform can solve some of the problem. While there has been some movement to improve property rights, the current leasing arrangement create a level of uncertainty which leads to migration. If there is uncertainty concerning property rights there will be less desire to stay in the countryside. Property reform laws were enacted in March of 2007 but the most important step is implementation and enforcement of the laws. Laws unenforced continue the cycle of uncertainty. See http://ww.cato.org/pub_display.php?pub_id=8745 for a detailed history and analysis of land rights in China since its inception.
Property rights issues are complex, but increasing the strength of land claims will reduce the desire for many to move and will increase the growth rate of foodstuffs. The reduced migration problem and a means to reduce potential food price shocks will allow an easier transition of exchange rates to something that is closer to fair value and floating with other world currencies.
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