Trade Flows Show China Must Revalue Yuan Soon
Jan 13, 2010
NEW YORK --Surging Chinese exports and an expansion in the U.S. trade deficit have shown this week that a revaluation in the Chinese yuan is the most urgent item of unfinished business for the global economy.
Most economists believe a modest appreciation in the yuan is inevitable sometime this year. The latest move by the People's Bank of China -- an incremental increase in its T-bill rate last week and a hike in reserve ratios and one-year T-bills on Tuesday -- could even pave the way for this.
But time is running out. Anger is growing around the world over what many see as a grossly unfair advantage for China's exporters. "The monetary disorder has became unacceptable," said French President Nicolas Sarkozy last week.
China's leaders have said nothing of plans to raise the value of their currency -- even though this would help diffuse inflationary pressures -- and have at times sounded hostile to the suggestion.
There are two explanations for this apparent intransigence.
The first, and scariest, is that Beijing is deaf to its trading partners' complaints. It holds that Chinese authorities, beholden to a deeply ingrained mercantilist mindset, are committed to their export-driven exchange regime at all costs.
If so, it's easy to imagine some sort of trade war emerging. Now that the 2008-09 crisis has abated, governments feel less constrained by the fear of provoking a global downturn, and with world trade recovering, there's a sense of injustice over one country unfairly getting the biggest piece of the pie.
Already, the Obama administration has slapped tariffs on Chinese tires and steel.
If the dollar keeps falling against the euro -- as the outlook for continued low U.S. rates suggests -- national governments in the euro zone will come under growing pressure from local producers and unions to act. In turn, they will put pressure on euro-zone authorities, including the European Central Bank.
To be sure, European and U.S. policy makers are chastened by institutional memory of the tit-for-tat tariff wars that exacerbated the Great Depression in the 1930s. And Asian nations will be unwilling to upset their giant neighbor, despite suffering the most in lost competitiveness to a weak yuan.
Still, domestic politics can take on a life of its own when trade imbalances grow. And if Europe and the U.S. take comprehensive action, Asia will be caught up regardless. The complexity of modern global supply chains means a protectionist backlash against China would be felt far beyond its shores.
We can't know how long Beijing, with its determination to build a developed nation on its own terms, would hold out against such an onslaught. With its $2 trillion reserve stockpile, it could use the implicit threat of U.S. asset sales as a counter threat against Washington. The world could be held hostage to an international game of chicken.
Let's hope that a second scenario plays out -- and soon. That one holds that despite the growing discord in its ranks, the Group of 20 developed and developing nations is quietly progressing with a plan to rebalance the global economy.
Somewhere in those diplomatic discussions, a Chinese move to let the yuan rise against the dollar has to be on the table. Depending on how much and how soon it happens, such a move would weaken the lobbying position of protectionist voices -- even if the direct trade impact would be slow to take effect.
And yet, unless agreements are made public, the protectionist bandwagon could take off in any case, jeopardizing the chance of a peacemaking compromise.
The world needs to hear that change is coming in China.
Jan 13, 2010
NEW YORK --Surging Chinese exports and an expansion in the U.S. trade deficit have shown this week that a revaluation in the Chinese yuan is the most urgent item of unfinished business for the global economy.
Most economists believe a modest appreciation in the yuan is inevitable sometime this year. The latest move by the People's Bank of China -- an incremental increase in its T-bill rate last week and a hike in reserve ratios and one-year T-bills on Tuesday -- could even pave the way for this.
But time is running out. Anger is growing around the world over what many see as a grossly unfair advantage for China's exporters. "The monetary disorder has became unacceptable," said French President Nicolas Sarkozy last week.
China's leaders have said nothing of plans to raise the value of their currency -- even though this would help diffuse inflationary pressures -- and have at times sounded hostile to the suggestion.
There are two explanations for this apparent intransigence.
The first, and scariest, is that Beijing is deaf to its trading partners' complaints. It holds that Chinese authorities, beholden to a deeply ingrained mercantilist mindset, are committed to their export-driven exchange regime at all costs.
If so, it's easy to imagine some sort of trade war emerging. Now that the 2008-09 crisis has abated, governments feel less constrained by the fear of provoking a global downturn, and with world trade recovering, there's a sense of injustice over one country unfairly getting the biggest piece of the pie.
Already, the Obama administration has slapped tariffs on Chinese tires and steel.
If the dollar keeps falling against the euro -- as the outlook for continued low U.S. rates suggests -- national governments in the euro zone will come under growing pressure from local producers and unions to act. In turn, they will put pressure on euro-zone authorities, including the European Central Bank.
To be sure, European and U.S. policy makers are chastened by institutional memory of the tit-for-tat tariff wars that exacerbated the Great Depression in the 1930s. And Asian nations will be unwilling to upset their giant neighbor, despite suffering the most in lost competitiveness to a weak yuan.
Still, domestic politics can take on a life of its own when trade imbalances grow. And if Europe and the U.S. take comprehensive action, Asia will be caught up regardless. The complexity of modern global supply chains means a protectionist backlash against China would be felt far beyond its shores.
We can't know how long Beijing, with its determination to build a developed nation on its own terms, would hold out against such an onslaught. With its $2 trillion reserve stockpile, it could use the implicit threat of U.S. asset sales as a counter threat against Washington. The world could be held hostage to an international game of chicken.
Let's hope that a second scenario plays out -- and soon. That one holds that despite the growing discord in its ranks, the Group of 20 developed and developing nations is quietly progressing with a plan to rebalance the global economy.
Somewhere in those diplomatic discussions, a Chinese move to let the yuan rise against the dollar has to be on the table. Depending on how much and how soon it happens, such a move would weaken the lobbying position of protectionist voices -- even if the direct trade impact would be slow to take effect.
And yet, unless agreements are made public, the protectionist bandwagon could take off in any case, jeopardizing the chance of a peacemaking compromise.
The world needs to hear that change is coming in China.
