For what it’s worth

Not the cause of all US woes

It’s the whipping boy that refuses to go away. It is, of course, China’s currency.

The renminbi’s peg was effectively fixed at 6.8 to the dollar in mid 2008 when exporters were hit hard by the global economic crisis. But business has since (largely) recovered. China even managed to overtake Germany as the world’s largest exporter last year.

That has made the peg a target for politicians and commentators in the US again. Columnist Paul Krugman has called China’s exchange rate policy “mercantilist” and “predatory”, and several senators are calling for retaliation.

In a talk to Democratic Party Senators earlier this month, President Obama, vowed to “get much tougher” and “put constant pressure” on China.

In his 2008 campaign, then candidate Obama had harsh words on the subject: “China’s manipulation of the value of its currency… provides Chinese companies with an unfair competitive advantage.”

More recently President Obama spun it a little differently. “It is also in [China’s] interest to allow their currency to appreciate,” he told Bloomberg BusinessWeek recently, “[since] there are a bunch of bubbles that are being created.”

The US President hasn’t officially labelled China a currency manipulator (so far) but if he does it could lead to a rash of tariffs on Chinese goods under US law.

Chinese officials and media have reacted with scepticism to claims the peg is unfair. “The US government should stop making the Chinese currency a false answer to its domestic problems,” suggested a recent China Daily editorial. “[The exchange rate] is China’s own business,” says Ministry of Commerce economist Li Jian, “China will not [strengthen the yuan] in accordance with the US’ demands.”

Premier Wen Jiabao says there’s a double standard. “[The same countries that complain about the peg] impose various protectionist measures against China,” he told the Xinhua News Agency in a recent interview, “the true purpose [of the complaints] is to contain China’s development.”

One big fear is that the economy might meet the same fate as Japan after it revalued the yen in 1985. “It’s not the right time to revalue the yuan” says Chinese Academy of Governance economist Wang Xiaoguang, “China is still very reliant on exports.” Wang added that strong imports in January – which grew 85.5% year-on-year – and a policy of boosting consumer demand renders the attacks on the renminibi’s value are unnecessary.

Even the IMF has waded in – surprisingly with some ammunition for the renminbi’s defenders. The fund’s chief economist, Olivier Blanchard told Xinhua that an appreciation of China’s currency is not “a panacea” for the US or the rest of the world. A 20% appreciation of the yuan would only add 1% to American GDP growth, the IMF reckons. Blanchard believes it is far more important for China to get its savings rate down (and consume more).

In China itself, there are some dissenting voices. For example, the Shanghai Securities News recently argued that a renminbi appreciation would have a benefit: it would “reduce imported inflation from rising international commodity prices”. Regardless of who is winning the debate, the market is betting on a policy shift. Renminbi forwards are currently pricing in a 2.3% appreciation. “Hot money is flowing into China to cash in on a future revaluation,” warned Shanghai Securities News.

The nation’s political leaders are not oblivious to the underlying issues. They acknowledge that China’s export-led growth model needs retuning. Premier Wen recently called the Chinese economy “unbalanced, uncoordinated and unsustainable.” And at last month’s World Economic Forum in Davos, Vice Premier Li Keqiang agreed that China’s economy is “excessively reliant on investment and exports”.

However – rather than letting the yuan appreciate – wages increases are viewed as a safer way to increase domestic spending without losing jobs. “The success of ‘Made in China’ exports [came at the price of] low wages and a failure to fully reflect environmental costs,” explained a recent CBN editorial, “Stronger environmental protection, greater social security, and higher wages can solve the structural imbalance.”

Coastal powerhouse Jiangsu province this month raised the minimum wage 12% in a bid to attract workers and move its industry up the value-chain. The China Association for Labour Studies President Su Hainan wants other provinces to follow suit: “Raising the minimum wage [immediately] increases the income of the poorest workers [and] promotes domestic demand.”

At least one American will be pleased by the policy shift. Richard Duncan, author of the 2005 bestseller The Dollar Crisis advocated rises in Chinese wages to correct global imbalances. Beijing seems to have got the message.

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