China rejects siren song on yuan
By Francesco Sisci
BEIJING - Chinese Premier Wen Jiabao's press conference with foreign media at
the end of the National People's Congress on Sunday delivered a slap in the
face to those in the United States who are calling for the appreciation of the
yuan against the dollar to help stem the ongoing global economic crisis. Wen
reiterated China's position on the thorny issue: Beijing will keep the exchange
rate stable.
The value of the Chinese currency is an extremely sensitive topic for Beijing.
The central government has already raised the possibility of revaluing the yuan
by about 10%. With reserves worth up to US$3 trillion, according to some
estimates, such a
revaluation would result in a theoretical loss of $300 billion. A 40%
revaluation, as some American economists request, would be worth an astounding
$1.2 trillion.
Given these figures, the Chinese government is certainly very worried.
Revaluation of the yuan would hit exports and have a direct impact on the level
of employment at companies reliant on overseas markets. Government calculations
suggest a 1% appreciation may correspond to a 1% reduction in exports - and
hence to an exponential decline in jobs.
Furthermore, there are a few complications. China has been asked to buy
American government bonds and thus it has helped finance the huge US recovery
plans. But now it is required to take a big cut in the value of this debt to
extend its assistance.
While it is true that China's purchases of dollars helped to keep the yuan
artificially undervalued - thus supporting Chinese exports - this policy can't
go on forever as the size of the loss China would shoulder is staggering. Thus
Beijing drags its feet, and is held back by more general concerns.
For more than a year, Washington has been promising new rules and regulations
to control Wall Street banks, which contributed to creating the current
economic and financial crises. These regulations, however, still aren't in
place. Nor are the parameters for a new global economic order that was to have
been born from the ashes of the crises. China, which contributed some 50% to
global growth last year, still has weak representation in economic
organizations like the International Monetary Fund and the World Bank.
Beijing wonders why China should trust the US on the revaluation while
Washington has not yet brought order to its own affairs.
Finally, the revaluation recipe itself is doubtful. In the 1980s, the US
pressed Japan for a revaluation of the yen, and that contributed to ensuing
economic stagnation in the country. The same could happen in China.
Today, in a state of continuing crisis, a significant move to appreciate the
yuan could have destabilizing effects and unpredictable outcomes, both for
China and throughout the world.
One immediate consequence could be a massive inflow of foreign capital into
China, betting on further appreciation of the yuan. This could make the present
financial and real-estate bubbles in China even bigger and increase
inflationary pressures. If the bubbles burst, the ensuing flight of capital
would plunge the Chinese economy into chaos.
That would be a disaster not only for China but for the rest of the world,
which could crash in depression since by itself the fall in the dollar's value
could not pull the American economy out of its doldrums.
Chinese economist Huang Yiping argues:
Let's imagine some scenarios in
which [American economist Paul] Krugman gets what he asks for: the US Treasury
Department names China as a currency manipulator and the [Barack] Obama
administration launches a trade war against China. If this were to happen, the
most likely scenario is that China would then stick to its current exchange
rate regime and retaliate with trade sanctions against America. This would
reduce trade between the two countries but, more importantly, seriously damage
investor confidence worldwide. A trade war between the two largest economies is
a non-trivial event for the world economy. In the face of a much more uncertain
economic future, investors would scale back their investment plans and
consumers would cut back their spending. [1]
Besides, Beijing
doubts that people in Washington want to export their crises to China and to
make China the bogeyman to stir public opinion and push the US for
protectionist measures against "mercantilist China".
A trade war between the economic giants would cause all countries to sink into
a depression far more acute than the ongoing one. Because of this, cooler heads
on both sides of the Pacific call for calm, cooperation and understanding of
each other's problems.
Yet there is a further twist in this story. Until the crisis, China took the US
financial and economic system as the undisputed model. The crisis has shaken
that trust and the performance of the Chinese economy in the past two years has
eroded it further. Some in China are wondering if something is deeply flawed in
the US economic model.
Most important, besides the cycles of the international economy, is America
able to lead the way out of the crisis? Isn't China better suited to find its
own way out of troubles? The past 30 years of reform, the experience of last
year and the history of failed advice from US pundits - to Japan in the 1980s
and then to Asia after the 1997 financial crisis - have strongly dented
America's intellectual leadership in times of crisis.
If the Krugmans [2] of this world are unable to fix the problems in the US,
what credibility do they have in dictating mantras for recovery to China on the
value of the yuan?
Meanwhile, on the other side of the Atlantic, many see arrogance in China. In
Britain's Daily Telegraph, Ambrose Evans-Pritchard wrote:
China has
succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for
weakness, mistaken the US credit crisis for decline, and mistaken its own
mercantilist bubble for ascendancy. There are echoes of Anglo-German spats
before the First World War, when Wilhelmine Berlin so badly misjudged the
strategic balance of power and overplayed its hand. [3]
His
seems not to be an isolated voice, and the room for mutual understanding seems
shrinking in recent weeks as mutual distrust grows - so the room for compromise
might become increasingly narrow.
China is becoming surer of itself, verging on arrogance. Beijing doesn't trust
American leadership in the crisis. And in turn, the US feels snubbed and
reviled as its intellectual leadership through a time of global economic
distress cuts less ice in China. It maybe ultimately is an issue of a clash of
moods. But, only the totally arrogant fail to pay attention to the mood of
others.
Notes
1. Krugman's Chinese renminbi fallacy March 15, 2010. Author: Yiping Huang,
Peking University.
2. Taking on
China, Paul Krugman. March 14, 2010.
3. "Is China's politburo spoiling for a showdown with America? The
long-simmering clash between the world's two great powers is coming to a head,
with dangerous implications for the international system." Ambrose
Evans-Pritchard, March 14, 2010. Click
here.
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