The equation between China’s currency, the yuan, and the American dollar has been a contentious issue, often taking precedence over other weightier issues. China has been accused of manipulating its currency rate to give its exporters an unfair advantage. On the other side, China has strong reasons to feel vindicated over its export-led growth strategy, which has obviously included an exchange rate policy to boost its export competitiveness.
So successful has China been with its growth model that it has, among other tangible achievements, the world’s largest foreign exchange reserves for any country. Like many other Asian countries which have built large forex surpluses, China has deployed them in the financial markets of the developed countries, especially the U.S. These countries have large deficits in their current accounts and are ever willing to absorb the current account surpluses of the Asian countries.
’Global imbalance’
The development of current account surpluses from a few, mostly Asian, countries bridging the large deficits of the U.S. and other countries is not new but its dimensions have grown so large that it has come to be identified with the “global imbalance”, one of the key factors behind the recent global financial crisis. While the crisis has abated, normality has not yet returned to the financial markets. Growth in the U.S. has been mostly jobless, although more recent data show an improvement in payroll statistics.
An orderly winding down of the imbalance is a precondition for normality. The exchange rate imbroglio with China shows how difficult it will be to find an amicable and mutually acceptable solution to what essentially is a highly visible symptom of the global imbalance.
Politicised issue
It is highly simplistic to suggest that once China lets its currency appreciate there will be an orderly rebalancing of the global economies. But that is how politicians in the U.S. have been viewing the problem, even attributing most of the domestic ills to the alleged distorted exchange rate of the yuan. More recently there has been an increasing clamour from the U.S. Congress to name China a “currency manipulator” for failing to appreciate its currency. This would enable the U.S. to take up the matter (of China’s alleged unfair trade practice) with the WTO and other forums or retaliate through an import duty on Chinese imports. Many European countries have joined the chorus. The issue has been highly politicised and it is clear that there can be no solution based on economic logic alone.
China’s modest response
In support of China, independent experts have pointed out that it is not as though it has been entirely inflexible. It has, in fact, revalued its currency in the past but the extent of appreciation has not matched the expectations of its trading partners. It will be ironical if the European Union and the U.S. complain to the WTO against China for subsidising its exports through a manipulated exchange rate policy. After all, these rich countries have supported their agriculture through subsidies and domestic support. It is their intransigence that has stood in the way of the Doha round of trade talks progressing.
The U.S. and the rest of the developed world have benefited from China’s exchange rate policy in at least two ways. China’s exports of a variety of manufactured goods at relatively low prices have helped in keeping down inflation in these countries. Secondly, it is doubtful whether the U.S. could have kept its interest rates so low if it did not have access to such large funds from China and other Asian countries for financing its deficits.
Domestic benefit
Within China itself there are vocal sections that would benefit by a stronger domestic currency. Imports into China will become cheaper. Like India, China is a net importer of petroleum products. It also imports huge amounts of iron ore. In a way, if business groups rather than just political leaders articulate their positions on the currency, it will be easier for the government to be seen acting on its own free will and without bowing to American pressure.
Ultimately the exchange rate imbroglio, though apparently concerning only the U.S and China, is really a global issue. If as a result of the revaluation of its currency, Chinese goods become dearer outside, there is every possibility that American consumers might start buying goods from countries like India and Vietnam. In varying degrees these countries are also affected by the exchange rate policies of China. It would be in the interests of every country if the differences between the U.S. and China over the exchange rate do not escalate into a trade war or otherwise stop the nascent global economic recovery.
Both the U.S. and China have their own domestic problems to attend to. The U.S. has to move away from consumption, housing and debt to exports, investment and savings. China has excessive national savings, now more than 51 per cent of its GDP, besides distortions in the prices of energy and other resources. An orderly unwinding of global imbalances can happen only after the world’s major economies first sort out their domestic issues.
QUOTE : Very recently, China seems set to announce a more flexible exchange rate policy, which will allow the yuan to vary everyday after an initial appreciation. This is expected to ease tension with the U.S.
