Revaluing the yuan helps no one

last SG · 2005-12-16T09:36:10+00:00

No, that's naive... It will move to the next low labour cost country likely Vietnam. Our govt has infact lay basic foundation there. China has also a huge c...

boy in blues SG

http://www.taipeitimes.com/News/editorials/archives/2005/12/12/2003284109

Revaluing the yuan helps no one

By Lo Chu-ping

Monday, Dec 12, 2005,Page 8
From US President George W. Bush through Congress and the Senate, there have been repeated calls for the Chinese to devalue the yuan in order to ease the current imbalance in Sino-US trade. It seems that China's undervalued currency is the sole culprit responsible for the US' gargantuan trade deficit.

The US trade deficit with China hit a record high of US$162 billion last year, a figure that constituted one-fourth of the US' total deficit for that year. It is expected to widen to US$200 billion this year.

However, export figures from China's customs authorities amount to only one-half of those of their US counterparts, which is a result of differences in how the two countries' customs authorities perceive Hong Kong. At the same time, the US$162 billion figure only includes goods, but not services and trade. The US actually has a trade surplus with China when it comes to intellectual property and other services.

Furthermore, the four Asian tigers have significantly reduced their historically huge trade surpluses with the US by switching the export of their goods to China. This has led to Hong Kong actually having a trade deficit with the US.

In other words, the US$162 billion figure represents the Greater China economic region's overall surplus with the US to a certain extent. As a result, the actual Sino-US trade gap has been exaggerated. Even if these figures were correct, balancing the US-China trade deficit would only take care of a quarter of the total, leaving it with a large chunk of the overall deficit untouched.

An even more important question is whether an appreciation of the yuan against the US dollar would really eliminate the US' trade deficit with China.

In the 1980s, prior to the rise of China, Japan was the main source of the US' trade deficit, totaling somewhere around US$40 billion. Back then, Japan brought the US to its knees in the automobile, semiconductor and home appliance sectors and the slogan "Japan First" could be heard everywhere.

On Sept. 22, 1985 the US and the European Community forced Japan to sign the Plaza Accord, which held that the Japanese yen was undervalued and that this was the main cause of the US' trade deficit. Japan therefore had to remove its dollar peg and let the yen appreciate against the US dollar. The language used in the accord was frighteningly similar to that now being used to force China into taking action over the yuan.

The difference is that back then, Japan was militarily and diplomatically dependent on the US, and did not have the power to say "No." After signing the Plaza Accord, the yen appreciated from ?250 to the US dollar to its current level of around ?100 to the dollar.

So how much did the US' trade deficit with Japan fall as a result of this 150 percent appreciation? The answer is that it has slowly increased to US$75 billion. Compared to 1985, the appreciation of the yen has increased the deficit by an additional 50 percent, even though the Japanese economy has been stagnant for over a decade. Still, we don't hear any one chanting the slogan "Japan First" today.

For the US, although its deficit problem remained unresolved, it at least accomplished its goal of eliminating the threat of Japanese economic hegemony.

Given this example, it is not surprising that China is not willing to listen to the US. The US' purpose in pushing for an appreciation of the yuan has nothing to do with resolving its trade deficit with China, since a devaluation will not resolve the issue. What the US probably wants to resolve is the threat posed by China's rising international status.

There are three main reasons why China will continue to resist US pressure for another two to three years and only then accept a token appreciation.

First, China currently has more than 60 million workers in its state-owned enterprises (SOE) and more than 300 million farmers and agricultural workers. By comparison, the 100 million-strong US work force only includes about 1 million farmers. The redundant personnel in China's SOEs and the excessive number of farmers that have to be given new employment number in the hundreds of millions, and this would be a hard task for any government.

China needs rapid economic growth and expanding export markets to create employment opportunities. If the Chinese yuan is allowed to appreciate too much, it could cause economic and export growth to slow. The enormous numbers of unemployed that would result would plant the seeds of social unrest and could possibly destabilize the government.

Second, the Chinese high-tech industry is still lagging behind multinational companies in terms of quality, but its prices are very competitive. Devaluing the yuan would harm the price advantage that China's high-tech industry currently enjoys, and this would probably kill off any hopes China has of competing internationally.

Third, if the Chinese yuan were allowed to float freely, China's weak financial system would become a target for international vultures. Besides, China is speeding up its financial reforms and the four biggest state-owned banks have already been listed on stock markets outside of China, which has attracted investments from international banks. They have also opened up management and board positions in order to become stronger and to help adapt to international demands.

Compare this to Taiwan's financial reform where domestic companies simply merge with one another and are unable to gain any international influence.

It is understandable that China will not allow its currency to fluctuate too much before carrying out its financial reforms so it can avoid attracting the speculators. Maybe China will allow the yuan to float by 2008 if it is able to complete its financial reforms in time.

China needs time, but that is something the US is not prepared to give. If the US really wants to resolve its trade deficit with China, two good approaches would be to abolish the Wassenaar Arrangement and remove restrictions on high tech exports to China, but that would speed up China's technology development.

It is obvious that this is a win-win solution to the problem. So it is difficult to understand why the US persists in pushing for the revaluation of the yuan when that will harm China while bringing no benefit whatsoever to the US itself.

Lo Chu-ping is an assistant professor of economics at National Cheng-Kung University.

Salman SG

What the hell is this professor talking about?
The Yuan is under valued by more than 20%. It is impossible to compete head on with them under such an arrangement.
If they appreciate it to par and it will definitely help the rest of the world out. Otherwise why would they under value it by so much in the first place.

boy in blues SG

i have highlighted some key points in red.
please refer back to my 1st post

Salman SG

Dear friend,

Why is the article looking to only one side of the problem and claiming that revaluating the yuan helps no one? Well it sure helps those who try to compete fairly don't you think?

Why does the world have to owe China anything at the expense of having high unemployment?

And I don't see any of your red words answering my basic questions. I think you can do better to explain the article.

boy in blues SG

If the Chinese yuan were allowed to float freely, China's weak financial system would become a target for international vultures. China is speeding up its financial reforms and the four biggest state-owned banks have already been listed on stock markets outside of China, which has attracted investments from international banks. They have also opened up management and board positions in order to become stronger and to help adapt to international demands.

China needs time, but that is something the US is not prepared to give.

If the US really wants to resolve its trade deficit with China, two good approaches would be to abolish the Wassenaar Arrangement and remove restrictions on high tech exports to China, that would speed up China's technology development. This is a win-win solution to the problem.

Salman SG

Again a one sided view from you that would not help.

Aren't we talking about revaluation? The Chinese govt can certainly revaluate w/o free float.
A revaluation would be fair to all and also improve domestic purchasing power and economy for China. Thats a win win situation for all.

sgdiehard SG

kindly explain "revaluate w/o free float?. Who decide how much to revaluate and be fair to whom?

boy in blues SG

to how much should the yuan be revaluated?

Gazelle SG

I personally dont think this is one sided arguement. In only show you the dirty side of US foreign policy. A unstable China is what US need to balance the power in the Asia pacific region.

Beside YUAN, the USA is also pushing for democracy and human rights in China. Why? Because democracy will not work in a developing country with 1.3 billion population.

Gazelle SG

FAIR? there is no such thing as FAIR in politics. China now has the upper hand in negotiation so why should they give this advantage to the USA? Honestly I dont think there is anything the US can do right now to stop the budget deficit. If US impose tarriff, major inflation will hit USA, and its economy will collapse, which will lead to world recession.

The only thing which US might be comtemplating is war in North Korea or Taiwan.

As for the "win-win" situation
If china export slows down, there will be more unemployment which will lead to social problems. The biggest challenge for the China government is creating jobs for the people. Please remember this, majority of the 1.4 billion population are very very poor, so any appreciation of Yuan will not make much difference to their purchasing power.

Salman SG

Again a one sided view from all of you.
Why must you people take sides on issues?

Why allow China to subsidise exports at the expense of the rest of the world?
What about job losses in Singapore and other southeast Asian countries? Don't people in this region need jobs too? What about unemployment and social stability in this region?

Its looks like you people have a one dimensional view on issues.

Gazelle SG

Why do Americans and Singaporeans buy so much China made products and not complaining that is it too cheap?

sgdiehard SG

Is China subsidising exports? will be glad to hear your view.

Chinese workers are paid 800 - 1200 yuens per month, some places even less, can you accept that?

Who is having one dimensional view?

Salman SG

Actually they do complain. They complain about the export subsidy that results in unfair competition.

Salman SG

Er... do you know what is export subsidy and how it happens?
You just brought it up yourself in your example.

Why do you think the Yuan is kept devalued and fixed?

Gazelle SG

Who are they? The US government? I dont think any consumers are complaining. Do you know walmart is one of the biggest importer of China made products? Why? Because it is cheap and good and consumers like it.

sgdiehard SG

where in example did I talk about export subsidy?

I didn't say it is devalued.

Gazelle SG

I think he got mixed up with the farm subsidies which US government is giving to the US farmers to compete in the export market.

or huge US military budget that is helping Boeing to compete with Airbus.

boy in blues SG

"Fair Trade"

Regarding foreign governments' subsidies to their manufacturers, we must never forget that receiving gifts doesn't make one poorer. Even in the "worst case" scenario, where the Chinese government (say) completely subsidizes its TV exporters in order to ship US consumers free plasma screens, this would be a boon to the American economy. Yes, it would put US television producers out of business, but it would allow US consumers to get TVs for free. After American workers had reshuffled in response to the free goods, per capita US income would be higher; instead of using scarce resources to produce television sets, we would now be showered with them for free and could use the freed up resources to produce additional goods and services. If, instead of free imports, American consumers instead receive merely cheap imports, the principle is the same: Foreign governments taking money from their own people and giving it to American consumers doesn't make us poorer.

Undervalued Yuan

Another oft-cited Chinese crime is its intentional undervaluation of its currency vis-à-vis the US dollar. Many have urged President Bush to get tough with the Chinese on this point, and indeed two senators have proposed slapping a 27.5 percent tariff on Chinese goods until they allow the yuan to float against the dollar.

The principles here are the same as with subsidies to foreign exporters; the Chinese government is once again making its own people poorer in order to benefit privileged Chinese firms (and US consumers of their products). However, in this case the Chinese government doesn't use its yuan to allow the special firms to sell below cost. Rather, the Chinese government enters the currency markets and buys dollars (with yuan) in order to artificially prop up the dollar's value. (In other words, if the Chinese government stopped buying so many US dollars with yuan, then the demand for dollars would fall and the yuan price of the dollar would fall the dollar would depreciate against the yuan.)

The point of these machinations is to stimulate Chinese exports. By holding the dollar artificially high against the yuan, Chinese goods (priced in yuan) are artificially cheap to US consumers, and hence they are more likely to buy goods from Chinese firms rather than from domestic competitors. As with subsidies, this policy of the Chinese government represents a simple gift to US consumers. Yes, it hurts the business of particular US producers, but not the economy as a whole; the benefits to consumers outweigh the losses to producers.

Some of those concerned about China understand the above, but they worry about the reckoning when the Chinese government decides to stop buying up so many US dollar bills. At that point, exchange rates would reflect the underlying fundamentals, and American consumers could no longer obtain Chinese imports as cheaply. Yet what's the problem? Isn't this exactly what the critics want to happen? In other words, isn't it strange that the supposed danger of these insidious Chinese practices is that they may someday discontinue them? (Incidentally, if it's merely the sudden shifts that worry people, we can rely on currency and other speculators to forecast the changes in policy as well as is humanly possible. After all, that's how speculators make their money.)

http://www.mises.org/story/1979

siginah SG

The problem with this view is that the feedback loop from producers to consumers in the form of employment has been left out. Eventually, as more producers incur losses, the level of employment will decrease due to cutbacks from companies. At that point, the only way for consumers to maintain the same level of aggregate demand would be to go deeper into debt.

US consumer debt is already at an unprecendented level. The potential for harm to the economy is grave when the eventual structural readjustments take place.

I'm surprised that mises.org failed to mention excessive credit expansion in such an analysis. Von Mises would have turned in his grave. :-)

regards,
siginah