BIZCHINA / Weekly Roundup
Further rise of yuan not a panacea
(Marketwatch via CRI)
Updated: 2006-04-13 09:20
Analysts are becoming skeptical a stronger yuan would ease U.S. trade
problems.
As expectations build that the Chinese government will take further steps
to allow the yuan to appreciate, analysts are becoming increasingly
skeptical a stronger yuan would ease U.S. trade problems.
In fact, a sharp appreciation of the yuan, as some U.S. politicians are
calling for, may spell trouble for the U.S. and world economies.
The issue could come to a head next week during Chinese President Hu
Jintao's visit to the United States. Some U.S. politicians say an
undervalued yuan (also known as the renminbi) is the main factor behind
the large trade deficit with China.
"It's a fiction to think a 10% revaluation of the yuan would have any
measurable impact on U.S.-China trade," said David Gilmore, a partner at
Foreign Exchange Analytics.
The lower cost of labor and material in Chinese products compared with
American ones means that a 10% revaluation would still leave the balance
in favor of Chinese exports.
A faster-than-needed appreciation could cause the prices of many goods
made in China to go up, creating inflationary pressures for the U.S. and
world economy, while at the same time reducing China's willingness to
finance the swelling U.S. deficits, analysts cautioned.
"If they revalue by more than 5 to 7% ... it would be nearly disastrous
for the U.S. and world economy," said Ashraf Laidi, chief currency
analyst at MG Financial Group.
Token move
Still, most experts are expecting some move in the yuan this month. Laidi
is expecting at least a token gesture that could take the form of
widening the dollar/yuan band to a range such as 0.6% from its current
0.3%.
Such a pre-emptive measure might ward off criticism from the Bush
administration during Hu's trip April 18 to 22 and might help ensure
China is not named as a currency manipulator in the Treasury's upcoming
report to Congress, said Kathy Lien, chief fundamental analyst at Forex
Capital Markets.
China revalued the yuan by 2.1% last July and hypothetically allows the
yuan to move as much as 0.3% daily against a basket of currencies. Since
the big move in July, the yuan has gained only 1.35% against the dollar,
greatly frustrating U.S. politicians who argue the Chinese currency
remains undervalued by as much as 40%.
The yuan has risen at an accelerated pace against the dollar recently,
amid heightened pressure from the U.S. It posted a new post-revaluation
high of 8.0022 on Monday, one step closer to the psychologically key
level of 8 yuan per dollar.
Marc Chandler, global head of currency strategy at Brown Brothers
Harriman, said a gradual widening of the hypothetical trading band would
be a low-cost compromise for China.
"Remember under Bretton Woods, a 1% band was regarded as fixed. And even
that 0.3% band is not being fully explored," Chandler said, referring to
policies implemented after World War II to manage the world economy.
Policy "misguided"
The more important question remains of whether a rise of the yuan against
the dollar would eliminate the U.S. trade deficit with China. That gap
grew 24% in 2005 to $201.6 billion, more than a quarter of the total
trade gap, according to government data.
The conventional wisdom is a stronger yuan will encourage Chinese
consumers to purchase more American-made goods while at the same time
making Chinese goods more expensive to U.S. consumers, therefore
narrowing the trade imbalances between the two countries.
"The U.S. policy is misguided by focusing on the renminbi exchange rate,"
said BBH's Chandler, adding that policy makers should focus on such
"bigger and more important issues" as enhancing intellectual property
rights and boosting Chinese workers' wages.
Ronald McKinnon, an economics professor at Stanford University, agreed
and said U.S. policy is "misplaced."
"Today's American mercantile pressure on China to appreciate the renminbi
against the dollar is eerily similar to the American pressure on Japan to
appreciate the yen that began over 30 years ago," said McKinnon.
Indeed, succumbing to pressure from the U.S., the yen went all the way
down from 360 against the U.S. dollar in August 1971 to touch 80 on the
dollar in April 1995.
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