BEIJINGThe visit here this week of Treasury Secretary John Snow has been the signal
that China must change its currency policy, enabling the yuan to appreciate
against the dollar. It would be reasonable to assume that it will start to move
within a few months, and gain 15 percent 20 percent by late 2004.
But there is a danger that such gains
will be too few and too late to prevent the U.S.-Chinese trade imbalance from
becoming an issue in a U.S. election year. Meanwhile the U.S. emphasis on the
benefits to America of a Chinese revaluation has obscured the two factors that
would make it easier for China to change its policy.
The first is the benefit to China of a
stronger currency. The second is the recognition that most East Asian currencies
should rise in the wake of a move by the yuan.
Recent rhetoric on both sides has created
friction. It makes no more sense to blame China for American trade and
employment problems than it does to praise China for buying U.S. bonds or
keeping a stable currency in a volatile world. The bottom line is simply that by
the normal tests of chronic trade and balance of payments surpluses, the yuan is
significantly undervalued against the dollar.
There would be three major gains for
China of a stronger currency. Most important in the short term would be to stem
the rampant money supply growth that originates in China's external surplus. To
the trade surplus is being added the inflow of foreign direct investment and the
return of local capital that had been parked offshore. Resultant credit growth
threatens to create real estate and other bubbles. China's measures to restrain
credit, such as a recent increase in bank reserve requirements, are inadequate.
Second, a stronger currency would
represent a rise in added export value and in the real wages of China's workers,
who would benefit from lower import prices. The main losers would be the foreign
companies using China as their source and who now account for more than 50
percent of China's exports. Their profits would fall. But given China's
competitiveness, their losses would be insufficient to persuade them to move
Third, a stronger yuan would take the
edge off growing resentment of China by many developing countries fearful of
seeing their own nascent industries swamped by Chinese goods.
Persuading China of the benefits of
revaluation would be much easier if it were done in tandem with pressure on
other East Asian countries. The United States has even sounded sympathetic to
Japan's case for a weak yen and seen South Korean concerns about China's pegged
yuan as support for its own case for change. The reality is that the balance of
payments surpluses of Japan, Taiwan and Korea are as chronic as those of China.
Malaysia's and Thailand's are similar.
China can legitimately claim that its
gigantic trade surplus with the United States is largely offset by its deficits
with Taiwan, Korea, Japan and Southeast Asia. It is often just the assembler of
more sophisticated products made in these countries. Growth in domestic demand
in China is also now feeding East Asian export growth.
For sure, these countries will be resist
appreciation so long as the yuan remains pegged. But they could all easily
absorb a coordinated realignment. Indeed, it is possible that Japan will regain
enough confidence to let the yen rise, which would provide good cover for a move
Focusing on China's currency alone
appears antagonistic toward China and thus counterproductive. It also makes
little economic sense. The yuan situation is just part of a massive overall
imbalance between the United States and East Asia.
Revaluations are not a cure-all. They
will not alone solve America's problems of excessive consumption and inadequate
savings. But they would be good for an increasingly interdependent East Asia,
spurring the local consumption needed to offset the inevitable leveling out of
U.S. import demand. China, above all, needs consumption growth to absorb the
output of its surge in fixed asset investment, and to find better use for some
of the $350 billion in reserves now propping up American rather than Chinese