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SPEAKING FREELY
Yuan moves show a confident China
By Zhiqun Zhu
Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say.
Please click here if you are interested in
contributing.
China's sudden decision last week to revalue the yuan slightly upward against
the dollar, and define it in terms of a currency basket instead of dollars
alone, sent shock waves across the globe. Days after the Chinese government's
surprise announcement, people are still wondering why China acted when it did
and what the consequences will be.
While many applauded China's latest policy shift as a positive first step
toward establishing a completely convertible currency system, some are
expecting more. Various international responses notwithstanding, the rise of
the yuan tells us a lot about China's economy as well as China's foreign
policy. No single factor can solely explain China's July 21 decision to
appreciate the yuan by 2.1%, but the significance of the decision cannot be
underestimated. What can we learn from the July 21 yuan appreciation?
First, China has its own timetable and agenda. Over the last couple of years,
China's trading partners, especially the US, have piled pressure on the Chinese
government to let the currency float freely. Some have argued that China has
artificially kept the yuan undervalued - by as much as 40% - to make its
exports less expensive and more competitive. After countless talks and
discussions with Chinese officials, many economists and officials in the West
became optimistic that China would appreciate its currency by at least 10%
before the end of 2005. Then came China's de-pegging announcement last week,
surprising most observers.
A closer look at recent Chinese foreign relations, especially US-China
interactions, may suggest that the timing of China's decision is not
accidental. In the aftermath of the publication of the US Defense Department's
hawkish annual report on the PRC's military strength, Beijing leaders want to
take the opportunity to demonstrate to the world that China is a responsible
power, both militarily and economically. This is perhaps a subtle Chinese way
of refuting the Pentagon report. Beijing leaders also want to distance
themselves from Major General Zhu Chenghu, whose remark a week ago that China
might resort to nuclear weapons in a war with the US over Taiwan created a
diplomatic fallout in Beijing's relations with the United States and other
countries. The implicit message in China's de-pegging decision is clear: China
cares about its international image, but it will determine when and how to
respond to international pressures and concerns.
Second, China has put the ball back in its critics' court. The heat has been on
in the US and the EU to press China to move faster toward a free and fully
convertible currency. Thus, China's latest move may help lower the temperature
in the capitals of the United States and Europe. Interest rates, housing and
automobile costs are not expected to rise soon in the US and EU, but shoes,
clothing and other light-industry imports from China may become a little more
expensive for Western consumers.
By raising the value of the yuan, China has partially answered the call of the
West to be a more responsible economic player. But this action will not
automatically reduce trade imbalances between China and its major trading
partners. Trade is supposed to be a mutually beneficial business. The ball is
now in the court of the US and EU: it is their turn to listen to and address
China's legitimate concerns and abandon discriminatory, punitive trade policies
toward China.
Third, China's move demonstrates its growing self-confidence. President Hu
Jintao and Premier Wen Jiabao needed to consolidate their power at home before
taking action on the politically and economically sensitive yuan revaluation
issue. But now that President Hu seems in firm control of the country, he has
more room to maneuver. Beijing's growing confidence has been reflected by its
policies toward Taiwan and the US, not just by the yuan revaluation action.
President Hu has invited and warmly received opposition party leaders from
Taiwan and proposed a series of agricultural and economic policies beneficial
to Taiwan. Beijing has even used the lovable panda in an attempt to break the
stalemate in its relations with the ruling Democratic Progressive Party (DPP)
in Taiwan. President Hu also promptly sent congratulatory telegraphs to Ma
Ying-jeou and James Soong for their election and reelection as chairmen of the
Chinese Nationalist Party (KMT) and the People First Party (PFP), respectively.
On another front, after many behind-closed-doors diplomatic efforts mainly by
China and South Korea, North Korea finally agreed to return to the six-party
talks in Beijing scheduled for the week of July 25. This development added to
China's confidence that it can play a crucial stabilizing role in Northeast
Asia. The currency reform set this confident China on a path to greater
financial independence and deeper integration with global markets.
Fourth, the yuan's revaluation opens up a new era of more active Chinese
business activities in the world. The old currency system forced Chinese
companies to pay more for imported oil, iron ore, and other products. A
stronger yuan, while not necessarily decreasing trade imbalances with the US
and EU countries, will help foreign companies compete with an avalanche of
low-cost Chinese goods. But it will also make foreign assets cheaper for
Chinese buyers, possibly prompting more takeover bids by Chinese companies like
those launched recently for US oil company Unocal Corp and appliance maker
Maytag Corp.
It appears likely that CNOOC's attempted purchase of Unocal will be blocked, by
the US Congress or the CFIUS committee if not by Unocal shareholders, but more
bids from Chinese companies to purchase foreign assets are expected in the near
future as China continues to accumulate purchasing power. The Chinese are
coming; are Americans and Europeans ready?
Finally, the yuan's appreciation is yet another sign of China's more mature
diplomacy. It has been speculated by many writers that China's gesture to
revalue the yuan may be President Hu Jintao's gift to President George W Bush
before his state visit to Washington, DC in September. Of course, such a small
token may not completely satisfy President Bush and members of US Congress, and
US-China relations will not drastically improve because of this; but it
nonetheless shows that Chinese diplomacy is becoming more mature: departing
from more rigid practices in the past, the regime has learned to occasionally
smooth the diplomatic wheel with economic butter.
In the final analysis, the yuan's revaluation represents the steady emergence
of a China that is becoming more confident and mature in international politics
and the international economy, and the impact of this will be felt long after
the revaluation issue has faded from the headlines.
Zhiqun Zhu, PhD, is an assistant professor of international
political economy and diplomacy at the International College of the University
of Bridgeport, Connecticut. He has researched and written extensively on Asian
political economy and US-Asian relations. He can be reached at
zzhu@bridgeport.edu.
Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say.
Please click here if you are interested in
contributing.
(Copyright (c) 2005 Zhiqun Zhu) |
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