The New York Times

October 13, 2009
Op-Ed Contributor

China and the Sickly Dollar


HONG KONG — President Obama has enough other issues with China on his plate that the value of the yuan is rather well down on his list of priorities in advance of two November meetings with President Hu Jintao, one in China, one in Singapore. The environment, trade spats, North Korea and Iran’s nuclear ambitions clearly have priority. But for much of the rest of the world, China’s near-pegging of its currency to the dollar is creating ever growing strains.

Indeed, Beijing’s insistence on sticking to the yuan’s alignment with a sickly dollar is being strengthened by xenophobic comments in the Chinese media. The notion that Beijing has real responsibilities to the international trading system by letting its currency adjust and freeing up its capital account like all the other major players in global finance may be accepted by many academics and senior officials. But it remains a difficult concept to accept for a political leadership flushed by economic success and 60 years of Communist Party rule.

It is only natural for the dollar to be weak. Currency valuation is part of the solution to global trade imbalances. For the United States, the approximate halving of its deficit since its peak two years ago has been due in part to a 15 percent fall in the trade-weighted value of the dollar and partly to the drop in consumption as American households have started to save again. The United States doesn’t need to worry now about a weak dollar anymore than President Nixon did in 1971. It is someone else’s problem.

Naturally, most of the pressure from the dollar’s decline has been felt by the euro and the yen, the only other significant reserve currencies. The euro and yen are now some 25 percent above levels of two years ago. But this in itself is setting off additional strains, particularly in trade-dependent Asia.

Europe is beginning to grumble loudly that excessive appreciation is not just damaging its trade with the United States but making it more open to predatory pricing by dollar-linked currencies, notably that of China. It has seen a smaller drop in exports to the United States than most countries and continues to gain market share elsewhere.

Japan has so far avoided direct efforts to stop the yen’s appreciation. Its new government is intent on finding ways to stimulate consumption, and lower import prices may be one way to do that. Although Finance Minister Hirohisa Fujii has been supportive of a strong yen, even he is talking now about the need for currency stability.

The currencies of other developed Asian countries like the traditionally strong South Korean won and Taiwan and Singapore dollars have all faced upward pressure as a result of dollar weakness. But so too have the Indonesian and Indian currencies, and those of Thailand and Malaysia. They are all beginning to complain and do what they can to stem appreciation, not so much because their exports to the United States are hurting any more than those of other countries, but because China is now a global competitor for many of their export industries. In the case of India, New Delhi has pushed through a rash of emergency trade restrictions specifically aimed at Chinese products. Such actions are likely to spread to East and Southeast Asia if currency issues are not resolved.

The dollar may be weak but central banks in all these Asian countries have continued to buy it to prevent their own currencies from appreciating too much. Some have also used state-controlled enterprises to hide dollar buying. All this flies in the face of what the International Monetary Fund thinks should be happening to currency values. Even the Asian Development Bank, not known for sticking its nose into such controversial issues, has been urging currency adjustment as a way of stimulating consumption, notably in China, and making trade cooperation easier.

Some manufacturers from Asia benefit from a weak yuan because China is the final assembler of high value-added products made elsewhere and ultimately destined for the West. But the regional dynamics are changing as China moves up the value-added chain, becoming a competitor in many industries.

Grandiose schemes for Asian regional cooperation complete with free trade pacts and currency stabilization agreements are all fine on paper. But the reality is very different — and will remain so until China stops believing that an artificially depressed currency value, damaging relations with neighbors as well as the West, can do much to solve its employment problems.