SPEAKING
FREELY To re or not to
re? By Jamus Jerome Lim
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SANTA CRUZ,
California - Recent arguments by many Western economic
commentators have focused on the benefits of yuan
revaluation for the other sputtering economies of the
world. Most vociferous among these has been the United
States, basing its case primarily on the role of China
as a responsible "global citizen". In retaliation,
Chinese economists have struck back, shrugging off
global concerns and stating unequivocally that China is
not responsible for the world economy's continued
growth, that Chinese monetary and exchange-rate policy
should be calibrated to accord with Chinese interests,
and that anyway China has already fulfilled its
international responsibilities by not devaluing during
the Asian financial crisis of 1997-98.
These
arguments clearly have merits on either side. However,
there has been little consideration of how China might
actually benefit from yuan revaluation. Such a strategy
might seem counterintuitive - how can China possibly
gain from a revaluation? Yet a closer examination of the
facts might prove the point.
Consider first the
point that China's main concern at the moment is
deflation, not inflation; as such, government and
central-bank policy should be oriented toward
kick-starting growth, rather than securing an
inflation-fighting stance.
There are some
parallels to pre-1990s Japan that support such a view.
China has the makings of a massive real-estate bubble,
leading to uneasy possibilities of an end to China's
recent rise in world markets. However, such an approach
seems unnecessarily (and excessively) cautious. Foreign
direct investment (FDI) flows into China seem nowhere
near the saturation levels of pre-bubble Japan.
Moreover, with continued foreign money pouring into
Chinese assets, the danger of not allowing the exchange
rate to adjust to maintain external balance means that
the money supply has to bear the brunt of mopping up any
excess liquidity. An inflationary environment could
rapidly develop, and if expectations of inflation are
validated and become entrenched, the situation would
rapidly deteriorate into an inflationary spiral, not
uncommon in developing economies. Given the relative
youthfulness of the People's Bank, this is the last
thing a central bank of an emerging economy needs.
Second, the case for a weak yuan also revolves
around the belief that China's growth is largely driven
by exports. While Chinese exports do account for a
significant part of the Chinese economy, one should not
underestimate the potential impact of domestic demand.
Biasing the exchange rate toward exporters and
import-competing industries - to the detriment of the
labor force as well as domestic firms, many of which
continue to obtain raw materials from abroad - is a plan
that can easily backfire. After all, one of China's
primary comparative advantages lies in the strength of
its 1-billion-strong domestic market, and this forced
redistribution could end up stifling growth, rather than
keeping it chugging along.
A final point regards
the external economy. Even if China holds no interest in
the welfare of the world at large, it might still be to
its advantage that the major Group of Seven economies
recover as quickly as possible. Continued sluggish or
stagnant growth in countries such as Germany, Japan and
the United States would trickle back down to China in
the form of lower demand for imports from China and, in
the medium to longer term, a drying up of the previous
FDI that China has come to rely so heavily upon as a key
driver of development. Furthermore, the recovery of
export-oriented economies such as Hong Kong's and
Singapore's - both of which have provided China with
much of the higher value-added services (such as
education and finance) that the Chinese economy is
currently unable to fully provide for itself - hinges on
the recovery of the big economies. Although the linkages
and feedback effects are indirect and far from obvious,
they are definitely not tenuous. In an era of
globalization, China would be shooting itself in the
foot if it failed to recognize, or chose to ignore, this
essential symbiosis.
Should China then revalue
its currency? The markets should be allowed to decide. A
floatation of the yuan is long overdue, and it is only a
matter of time before the Chinese economy becomes
sufficiently complex and diversified such that a
floating regime would be the best instrument to maintain
internal and external balance. What better time than now
to do so, in a move that would not only serve China's
purely economic interests, but also placate Western
voices and possibly even buy some valuable political
capital from the rest of the world?
Jamus
Jerome Lim is a PhD candidate in the international
economics program at the University of California, Santa
Cruz. He holds master's and bachelor's degrees from the
London School of Economics and the University of
Southern Queensland. He has been a research associate at
the Institute of Southeast Asian Studies, and an analyst
at the former JP Morgan. He recently co-edited a
book, Information Technology in Asia: New
Development Paradigms, published by the Institute of
Southeast Asian Studies.
Speaking Freely is
an Asia Times Online feature that allows guest writers
to have their say. Pleaseclick hereif you are
interested in contributing.
