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Editor's note
There have been many hints in recent
months that China is considering a major
revaluation of the yuan, allowing it to strengthen
against the dollar. In the last few days, there
have been increasing indications that such a move
might be imminent:
At a meeting on May 10 between mid-level
banking officials of the US and China, US
officials emerged saying that there had been
"progress" on the revaluation issue
According to a May 9 report in the
Baltimore Sun on Asian financial markets, the
renminbi was actually allowed to float against the
dollar for about 20 minutes in late April,
although it is unclear if this move was a
technical lapse or a deliberate test
On March 14, Chinese Premier Wen Jiabao
acknowledged that Chinese officials are "working
on a plan" for revaluation
It has been reported in the Chinese press
that currency analysts with JP Morgan and ABN
Amro, among others, expect at least a 5-10% rise
in the yuan this year.
In the last few days, Chinese government
news services published an unusually frank
editorial (republished in Asia Times Online on May
9, click here to read the
article) arguing that China
should reduce its dependence on foreign direct
investment. Because a reduction in FDI would be
one consequence of a revaluation, the editorial
may be part of a policy to prepare China's
population for the revaluation move, and avoid the
appearance of giving in to foreign pressure.
The following article explains the root
causes of the pressure to revalue, and discusses
some negative aspects of the weak yuan
policy.
Export flood fuels revaluation
debate
By Carrie Chan
China's booming exports in recent months
have re-ignited the debate over revaluing the
Chinese yuan, that is, allowing the yuan to
strengthen against the US dollar. Analysts
attribute the rapid export growth to the expiry of
the international textile quota system on January
1, 2005 and the strong momentum of years of
foreign direct investment (FDI). Among experts,
the general consensus is that China will not
revalue the yuan soon, but most acknowledge that
the yuan will have to appreciate eventually in
order for Beijing to maintain control over the
overheated economy.
Despite Chinese
Premier Wen Jiabao's frequent calls to slacken the
torrent of exports pouring out of mainland
factories, the export flood continues. According
to Chinese customs statistics, the first three
months of 2005 recorded a year-on-year export
growth of 34.9%. And the US Department of Commerce
reported a 60%-plus rise in imports of textile and
apparel products from China in the first quarter
of 2005.
The wave of exports has made both
the European Union (EU) and the US, two of China's
largest trading partners, increasingly restive.
Both are warning that they may adopt penalties
such as punitive tariffs on exports from China if
Beijing continues its passive response to the
situation. The US Senate recently passed a bill
stipulating a 27.5% tariff to be imposed on all
Chinese imports to the US if China fails to
revalue its currency within six months. The bill
states that China's undervalued currency, the
trade advantage China derives from that
undervaluation, and the Chinese government's
intervention in the value of its currency violate
both the letter and the spirit of the world
trading system of which the People's Republic of
China is now a member.
Actually, China's
vigorous exports in recent months were largely
stimulated by the expiration of the international
textile quota system on January 1, 2005. During
the Uruguay Round of multilateral trade talks 10
years ago, participating nations agreed that the
increasingly unwieldy quota mechanism for the
global rag trade should be abolished in 2005. In
the ensuing 10 years, globalization demolished
many trade barriers, thus smoothing the path for
the further development of international trade.
These developments created a beneficial
environment for China, now known as the "world's
factory".
Years of foreign investment
influx are another major contributing factor to
the Chinese export boom. The economic giant
captured US$50 billion of foreign investment in
2003, and another $60 billion in 2004. Investments
made in China over the past few years are now all
seeking returns. As a result, foreign-funded
projects have expanded China's overall production
capacity, inevitably pushing up export numbers.
Peter So, head of China research at
Macquarie Securities, believes that China's
exchange rate will not see a big hike. "It is
possible and widely expected that there will be a
hike of under 5%, since Beijing needs to maintain
a stable environment for its ongoing banking
reforms."
On October 28, 2004, the
People's Bank of China, the country's central
bank, raised its benchmark one-year lending rate
by 0.27% from 5.31% to 5.58%, the first increase
since July 1995. Simultaneously, the one-year
deposit rate was hiked by the same magnitude, from
1.98% to 2.25%, the first increase in that rate
since July 1993. It is widely recognized that
these interest rate adjustments have helped to
pull the overheated economy back on track.
Inflation hit 3.9% in February, and taking
the one-year deposit rate of 2.25% into
consideration, the real interest rate is now
actually slightly negative. Peter So thinks that
Chinese interest rates will continue to climb, but
only slightly, since "banks have to retain a
positive cost of funds to avoid an economic
bubble, and at the same time maintain the status
quo for a while to further encourage consumption".
Advantages of revaluation
Liu
Peiqiong, associate professor from the School of
Accounting and Finance of Hong Kong Polytechnic
University and a member of China's National
People's Congress, says once the exchange rate is
revalued, China will be able to successfully slow
down the excessive inflow of foreign investment,
cool down the red-hot manufacturing sector, and
ultimately maintain a healthy economic
development.
"Because it is rigidly pegged
to the US dollar, the Chinese yuan has depreciated
50% in the past few years [in tandem with the
depreciation of the dollar]," she added. The
current weak value of the yuan is a double-edged
sword: it gives a competitive edge to China's
export-oriented enterprises; however, at the same
time, it causes the trading environment for
Chinese products to deteriorate because China's
trading partners attribute the disorder in their
domestic markets to a flood of Chinese exports and
some even begin to levy punitive tariffs on
Chinese goods. The strong exports also cause an
accumulation of huge amounts of foreign exchange
reserves, which tends to exert inflationary
pressure on the Chinese economy.
According
to Liu, although the devalued yuan attracts
foreign investment, this brings little benefit to
ordinary Chinese workers because only a tiny part
of the investment goes to their salaries; most is
spent on acquiring the necessary patents and other
intellectual property rights to produce the goods.
Recently, Jin Renqing, China's minister of
finance, and Zhou Xiaochuan, the governor of the
People's Bank of China, rejected an invitation to
an impending G7 summit in Washington. It is widely
believed that they refused in order to avoid
another face-to-face accusation of undervalued
yuan and further demands for an appreciation.
(Copyright 2005 Asia Times Online Ltd. All
rights reserved. Please contact us for information
on sales, syndication and republishing.) |
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