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China's currency: Renminbi and
ruin?
By Hussain Khan
TOKYO -
Protectionist pressures similar to those visited on
Japan in the 1970s and 1980s are growing in the United
States to force China to float or revalue its currency.
But those advocating a revalued yuan should be careful
what they wish for, because they might get it.
Certainly, the world's currency and equities
markets have been roiled dramatically since September
22, when the administration of US President George W
Bush dragooned the Group of Seven finance ministers into
issuing a statement that exchange rates needed to be
flexible to reflect economic fundamentals. That
statement caused currencies all over Asia to suddenly
begin to gyrate.
Is China the culprit it is made
out to be? Certainly, powered by cheap labor and an
undervalued currency, the People's Republic has been
transformed from relative isolation to major global
exporter in fewer than 20 years. Because of its
flourishing export trade, sniping from competitors has
grown, with Western manufacturers accusing the country
of remaining relatively closed and cheating on its World
Trade Organization (WTO) obligations after becoming a
member almost two years ago.
In fact, China,
driven under the lash of the former prime minister, Zhu
Rongji, has borne a good deal of pain and opened its
markets faster than anybody thought possible. Nick
Lardy, senior fellow at the Institute for International
Economics, told his audience at a recent Merrill Lynch
seminar in London that China is "very deeply integrated
into the global economy" and "more importantly, deeply
enmeshed in the global supply chain".
Import
tariffs came down by two-thirds before the country
joined the WTO, Lardy said. By 2005, tariffs on
manufactured goods will be 9 percent, far below
Argentina's, for example, which are in the 20-30 percent
range. Import quotas and licenses have all but gone and
will be zero by 2005. Moreover, the number of Chinese
companies authorized to conduct foreign trade has risen
rapidly in the past two years. On Lardy's criteria,
China is three to five times as open as Japan. And,
while China is running a monumental trade surplus with
the United States, its current-account balance is fairly
close to even because of its exports from other nations.
The problem with the US manufacturing sector is
that it has lost jobs for 37 months in a row - nearly
the entire tenure of the Bush presidency - totaling
about 2.7 million since July 2000, dragging down the
labor market and creating a critical issue in the 2004
presidential race.
Alarm bells have begun to
peal in Washington, DC, where both Democrats and
Republicans are ever willing to exploit any issue that
will give them traction with the voters. Three bills are
currently under discussion that are aimed at what is
described as China's "currency manipulation", despite
the fact that the yuan, known internally as the
renminbi, has been firmly pegged at 8.28 to the US
dollar for several years. In fact, the United States was
eternally grateful during the Asian financial crisis of
1997-98 for China's steadfast refusal to devalue the
yuan and kick off a round of competitive devaluations in
Southeast Asia.
But China is a big, visible and
happily overseas target for US politicians on both sides
of the political aisle. More than a decade after US
politicians were taking Japan to task almost daily for
its then-huge trade deficit, China has shifted into the
gunsights. As politicians once bashed Japanese cars on
the steps of the Capitol in Washington, it is in the
realm of possibility that something Chinese is about to
be bashed today.
Since Saudi Arabia set out to
punish Western countries for their support to Israel by
suddenly raising oil prices by more than 400 percent in
the 1970s, the economic growth rate of industrialized
countries has dropped significantly, to about 2 percent
level on the average. China is the only major country
that has posted gross domestic product (GDP) growth of
about 8 percent over the past two decades.
The
industrialized countries have therefore found trade and
investment in China enormously attractive. Industry
ministers, prime ministers and presidents have led
delegations to China, made agreements and competed with
each other to acquire an ever larger share of China's
investment market. Various US governments held their
noses over China's human-rights record, all the while
continuing to accord the country most-favored-nation
status, made permanent by the administration of Bush's
predecessor, president Bill Clinton. Instead of imposing
sanctions, China's human-rights violations have been
forgiven in the drive to gain better access to Chinese
markets.
As a result of these investment
recommendations, China has emerged as a manufacturing
giant. The availability of cheap labor has hollowed out
some labor-intensive sectors in the industrialized
countries and given a competitive edge to all those
goods manufactured in China. Labor costs are so cheap
that no country in the world can compete with it in
export markets. This has caused the rapid growth of
capital inflows in China as well as of exports and of
foreign-exchange reserves.
Now the time has
arrived to suffer the consequences despite the fact that
those consequences are going to come back to haunt
Western manufacturers. Some 65 percent of Chinese
exports are manufactured by Western and Japanese
factories, often with components imported into China and
then re-exported. Cheap Chinese manufactured products
have invaded industrialized countries, resulting in the
closure of domestic manufacturing factories.
The
constantly widening US trade deficit reached the
second-highest level of imported goods on record in
July. The trade deficit rose by US$40.3 billion as
imports of consumer goods from China and oil hit record
highs.
"Big-spending consumers, with refund and
refinancing checks in hand, helped push the US trade
deficit wider in July as higher imports, largely of
consumer goods, outweighed export gains," said Leslie
Preston, an economist at CIBC World Markets in Toronto.
Imports of goods and services to the United
States rose to $126.5 billion in July while exports also
rose, to $86.1 billion, the strongest showing since May
2001. These deficits made the dollar weaker despite the
US administration's desire to keep it strong. Sherry
Cooper, chief economist at BMO Nesbitt Burns in Toronto,
pointed to the 18 percent decline in the US dollar
against major currencies such as the euro.
These
deficits have resulted in large dollar surpluses in the
hands of China, Japan and other Asian countries (see Asia fills her boots: currency reserves
skyrocket, July 15).
China's
foreign-exchange reserves alone now exceed $357 billion.
The only way these Asian countries have been able to use
this surplus is to invest it in US government
securities.
"Asia's largest economies are
aggressively sinking the spoils of their trade surpluses
with the United States into the purchase of US
government securities, financing much of the widening US
federal budget deficit," Peter Goodman of the Washington
Post reported from Shanghai.
If the yuan were to
be significantly revalued upward against the US dollar,
US Treasuries would suddenly become considerably less
attractive to Asian central banks, which could go
looking for other places to invest. Then the US economic
dilemma would rapidly become a whole lot more
complicated. The US Federal Reserve would have to raise
interest rates to continue to attract foreign investors,
who pour $1.5 billion a day into US securities.
So would cutting China's exports by floating or
revaluating the yuan create broad-based prosperity or
employment growth in the US? Since World War II, the
United States has constantly lost industries to overseas
competition. US jawboning resulted in the Plaza Accord
of 1985 in an attempt to cut Japan's trade surplus.
After the Plaza Accord, Japan floated its currency. The
yen appreciated, to little effect. US industries,
primarily car makers, discovered that now they were
competing on quality, not price, and they continued to
lose market share.
But it did have one major
effect. The Japanese, in a matter of months, transferred
much of their industrial plant to the rest of Asia and
ultimately provided China with the opportunity to
replace Japan as the No 1 exporter. As the Japanese
industrial diaspora continued, other Asian countries
also made inroads into the US market.
US
manufacturing costs and quality problems continued to
cost manufacturing jobs. But instead of facing up to
their weaknesses, the manufacturers are now replacing
Japan bashing with China bashing. A yuan revaluation by
as much as 40 percent is being suggested as the
competitive tipping point.
But even if that wish
materializes, it may be a temporary phenomenon. It is
more likely that the same story will be repeated. Japan
grew vastly richer on endaka, or high yen, as it
was known, exporting the same goods on a higher level of
revalued yen until the situation became untenable and
Japan endured a crash that it is only now tentatively
digging out of.
If under US pressure China
floats the yuan, it will have more dollars in its hands
and US manufacturers will be unable to reverse the
20-year-old trend of losing to foreign competition. And,
because the cost of manufacturing will rise on the
upwardly floating currency, the 65 percent of exports
produced by Western-owned factories in China will become
more expensive and less competitive. Western and
particularly US industry would inevitably suffer.
"What an upward revaluation of the yuan could
do, however, is firstly make goods more expensive for
the heavily indebted American consumer and, more
importantly, pull the rug from under China's economic
development and integration into the international
community," said William Belchere, chief economist at
JPMorgan Asia Pacific.
"It could do this at a
time of global economic fragility and with serious
weapons of mass destruction crisis on its own doorstep,
in the form of North Korea's announced nuclear-weapons
program."
(Copyright 2003 Asia Times Online Co,
Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication
policies.)
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