US-China yuan debate needs new
currency By Muhammad Cohen
HONG KONG - A high-ranking US Treasury
Department official arrives in Beijing to talk
tough about the Chinese yuan. A news story
perhaps, but not a new story.
These days,
the Bush administration, presidential candidates
of every stripe, and members of Congress are all
loudly urging China to revalue the yuan upward.
But in the version above, the year is 1997, the
official is deputy treasury secretary Lawrence
Summers, and the US demand is that China maintain
the value of
its
currency, not change it.
A decade ago, the
debate coincided with the Asian economic crisis.
Starting with Thailand, emerging economies around
the region let their currencies float and exchange
rates plunged. Since these so-called tiger
economies held vast quantities of
US-dollar-denominated debt, they needed a lot more
baht, rupiah or pesos to repay those loans.
Borrowers defaulted, banks foreclosed, businesses
went bankrupt, economies collapsed.
Exports were the best option for crawling
out of this abyss. Weakened currencies gave the
bloodied tigers' goods an advantage in global
markets. But their neighbors were trying to
increase exports, too, with similar determination
born of desperation.
China's currency was
not traded internationally and its economy was
insulated from the regional chaos. But China's
growth was also export-driven, and Asian rivals'
exports had become suddenly, dramatically cheaper.
The United States feared that China would
weaken the yuan to maintain market share,
prompting rivals to devalue their currencies
further, creating a vicious downward spiral,
increasing economic misery and the chances for
social and political upheaval.
To avoid
this potential death race for exports, the US
needed China's help and sent Larry Summers to get
it. What's surprising is that in 1997, in contrast
to the present US-China currency impasse, the two
sides wanted the same thing, albeit for different
reasons.
Today we think of China as the
world's factory floor, but in 1997 no one foresaw
that the Asian crisis would funnel investment
previously spread around the region to China. Back
then, China's exports were still skewed toward
low-tech products - dolls, dresses and drill
presses, not microprocessors and mobile phones -
and reliant on East Asian markets. China wanted
its top customers' economies to recover, not go
under.
The Chinese leadership also may
have taken a paternalistic interest in
ethnic-Chinese populations across Southeast Asia.
Overseas Chinese were often well off, so had lost
the most in the crisis, had the most to gain from
recovery, and had the most to fear from chaos, as
tragically illustrated in Jakarta's riots of May
1998 that burned much of the Indonesian capital's
Chinese enclave, killing hundreds.
So when
Summers met with China's newly appointed premier
Zhu Rongji in 1997, they discovered a common
interest in keeping the yuan stable, and Asia
averted a barrage of retaliatory devaluations.
Fast-forwarding to 2007, it's unfortunate
that the US and China don't share a common
interest again.
Today, China wants to
maintain its exports' competitiveness. It wants to
keep attracting huge shares of global direct
foreign investment. It wants to maintain the value
- in yuan terms - of its vast holdings of US
Treasury securities. For all of those reasons,
China wants the yuan to stay weak, or at least not
get too much stronger too fast.
The US, of
course, has different desires. It wants cheap
imports to keep inflation low. If China
strengthens the yuan, that doesn't mean the US
will cut imports and regain manufacturing jobs
that moved overseas years ago. A stronger yuan
likely means the US will import less from China
and more from rivals with cheaper currencies, such
as Vietnam.
The US also wants to find
buyers (and holders) for its Treasury securities
to finance its current-account deficit, averting
interest-rate hikes that could burst its asset
bubble. That combination of low inflation and
lower rates enables the US to keep importing goods
at record levels and paying the bills with
borrowed money. For all of those reasons, the US
wants the yuan to stay weak, or at least not get
too much stronger too fast.
So China and
the US actually agree about the yuan. What's
different this time compared with 1997 isn't lack
of agreement on the currency issue, but lack of
patience and effective dialogue to discover it.
Sadly, that's not a new story in US-China
relations either. But it is an increasingly
dangerous one given the range of key issues where
the US and China really do disagree and the dire
consequences for both sides, the Pacific rim and
beyond, of failing to seek common ground,
especially when they're both standing on it.
Former broadcast news producer
Muhammad Cohen is special correspondent for
Macau Business and author of Hong Kong on Air
(www.hongkongonair.com), a novel set during the
1997 handover and Asian economic meltdown
featuring television news, love, betrayal, high
finance and cheap lingerie.
(Copyright
2007 Asia Times Online Ltd. All rights reserved.
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