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Yuan revaluation: The view from
Oz
CANBERRA - It was once
thought that if the United States economy coughed,
the rest of the world would catch cold. But
increasing temperatures between the US and China
threaten not only a dose of economic flu but
something even worse - a global recession.
The battle between the two is over the
Chinese currency, the yuan, and the way it is
pegged against the US dollar. The United States,
and most of the developed world, argues that the
Chinese have deliberately undervalued the yuan.
Effectively, it means Chinese imports are cheaper
than they should be and exports into China are
more expensive than they otherwise would be if the
market dictated the value of the yuan. This may be
good for China, as it tries to lift hundreds of
millions of people out of poverty, but not so good
for businesses in other countries, as they try to
compete with cheap Chinese imports.
A
couple of trade deficits illustrate the point.
America's trade deficit with China was US$42.4
billion (A$55.77 billion) in 1996. Last year the
deficit was US$175.8 billion. Australia's trade
deficit with China has similarly increased. In
2000 the deficit was $3 billion. Last year it was
$7 billion, and during the past two years, China's
share of Australia's total merchandise imports
grew to 14.1% from 10.9%.
In recent days,
the US has ramped up its rhetoric against the
Chinese pegging system, which should have everyone
with a stake in the global economy worried. It
described the yuan pegging as "highly
distortionary and poses a risk to China's economy,
its trading partners and global economic growth".
The US further signaled that without action, it
may be forced to take action against China and its
imports.
Trade Minister Mark Vaile,
battling some of the worst trade figures in
Australian history, said China would eventually
have to move on its currency. But he can see the
risks that major changes to the Chinese currency
poses to the domestic economy, and the global one.
"We accept that it's an issue of sensitivity
between the US and China, and our discussions with
Chinese counterparts raised the issue, but we've
also had discussions with American colleagues on
the issue as well," he said.
JP Morgan
economist Stephen Walters, who believes the yuan
is about 40% below where it should be, said the
risks posed by an appreciation in the Chinese
currency were many. Prices of Chinese imports will
rise, making much of what Australians buy more
expensive. That means an increase in inflation,
and eventually higher interest rates. "If prices
of Chinese imports are rising, we think it will be
a moderate rise initially, but it does mean that
inflation could pick up in Australia, there will
be a general rise in prices, and that [would] mean
that all other things being equal, there should
also probably be higher interest rates in
Australia," he said.
China's low-priced
goods are the main reason why Australians have
been able to buy up consumer products such as DVD
players, plasma screen televisions and most of
their clothing at such cheap prices in recent
years. For instance, clothing and footwear
products are actually almost 4% cheaper now
compared to what Australians were paying for them
two years ago. Household furnishings are about the
same price.
And it's not just the consumer
who has enjoyed the benefits of the under-valued
yuan. Australian manufacturers, although suffering
because of the increased competition from China,
have benefited through much cheaper input costs.
Machinery needed by Australian manufacturers is
much cheaper than it would have been, because of
the undervalued yuan.
So imagine the
problems caused by a Chinese government that bows
to international pressure and ramps up its yuan.
The cheap plasma screen television suddenly isn't
so cheap. That piece of machinery costs more than
what it did a few months ago. Inflation starts to
creep up and the Reserve Bank starts to think it's
time to calm the economy down with a dose or two
of interest rate rises. It's a surprise, then,
that the Australian government budget released in
mid-May failed to even mention the potential
global economic problems that might follow from a
change in the potency of the yuan.
There's
also the internal shocks China could face from
changing its currency system. Westpac
Institutional Bank senior economist Huw McKay this
week warned that forcing a communist, centralized
nation such as China to invite market forces
through the front door could cause a huge number
of problems. The biggest issue is that Chinese
banks, propped up by Beijing, have a huge number
of bad loans. Forcing those banks to compete, as a
precursor to running monetary policy more like a
nation such as Australia and the US, could send
many to the wall. A meltdown in the Chinese
banking system would mean one thing, according to
McKay - "essentially a global recession". And a
global recession is the last thing any country
wants.
Higher interest rates would also be
very uncomfortable for the Australian government,
which campaigned during the recent election on its
ability to keep them low. It means that the
high-tension talks going on over a currency few
Australians have ever heard of could determine
their economic health for the months and years
ahead.
(Asia Pulse) |
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