Why should China appreciate the renminbi? The answer is simple: in order to foster private Chinese consumption. It is easy to understand that an appreciated exchange rate can raise the purchasing power of households (and firms), who could buy abroad more goods (and commodities). Of course, with a stronger Yuan it would be more difficult to export Chinese products, and for that reason Chinese policymakers will have to balance costs and benefits of such a decision.

The case for an exchange rate appreciation finds now empirical evidence in a paper by Kal Guo and Papa N’Diaye, both at the International Monetary Fund. Studying the determinants of the Chinese consumption – that “has declined from around 55 percent in the early 1980s to around 37 percent in 2008” – they find that the share of consumption increases “by around 2 percentage points for every 10 percent appreciation in the real effective exchange rate”. This effect, Guo and N’Diaye explain, “appears large, especially given that the [negative] effect a stronger currency has on other variables such as the level of household income or the share of employment in services” (controlled in the analysis).

Of course, a “real effective exchange rate” is something different from the nominal rate vis-à-vis the U.S. dollar. Moreover, the paper’s results are a statistic extrapolation, the mathematical model can be too simple, or the future can be different from the past. However, the method is right. So, after evaluating all the political, economical and financial variables, China could slowly attempt to appreciate the renminbi in order to raise consumption. This is an important political goal for the government: a richer middle class means – this is the regime’s hope – a more coherent Chinese society.

This is even a good way to advocate an exchange rate appreciation. It is a big mistake to think – as the Nobel laureate Paul Krugman does – that it is successful to urge Chinese government to appreciate the Yuan simply telling that this is what the U.S. – or the Italian, the Brazilian, the Indian – government wants. It is better to maintain that a stronger renminbi is to everybody's advantage. The consumption argument is a precious way to do it.