More On Yuan Appreciation

["Gary Santos" <evs@xxxxxxxxxxxx>]

Posted by PaxWax (Tuesday, June 17, 2003)
China pressured to sever Yuan-Dollar Peg
 http://www.bradynet.com/bbs/china/100042-0.html

White House May Press China to Sever the Yuan-Dollar Peg (WSJ)
While Treasury Secretary John Snow and President Bush continue their public
debate over their own policy on the dollar, the Bush administration quietly
is confronting another big-bucks foreign-exchange issue: Is it time to prod
China to untether its currency from the dollar and let it rise?


This might be the only instance of U.S. unilateralism that would draw cheers
from Tokyo to Tijuana, from Toulouse to Toledo, Ohio.

China, an export powerhouse, essentially fixes the yuan at 8.28 to the
dollar. Most other big countries allow their currencies to move up and down.
While the dollar has fallen by more than 30% against the euro over the past
16 months, it hasn't budged against the yuan.

That is terrifying manufacturers around the world who are having trouble
enough competing with China as its exporters exploit the significant
advantages of cheap labor and, sometimes, of bank loans that aren't repaid.
Despite disruptions from the SARS epidemic, China said this week its exports
for the first five months of the year were 34% above a year earlier.

Although experts differ on where the market would take the yuan if China let
go, most betting is that the currency would rise. China's huge and growing
foreign-currency reserves, $316 billion at last count, suggest that. And so
does the Economist, the British weekly, with its regular comparison of Big
Mac prices around the world, which rests on the theory that the exchange
rates should tend to equalize the price of the same goods and services
between two countries. Since a Big Mac cost on average $2.71 in the U.S. in
April, but only $1.20 in China, the magazine figures the yuan is 56%
undervalued against the dollar.

In the Clinton years, the U.S. Treasury began to push the Chinese to let
markets have more say in the yuan's value. But the U.S. quickly abandoned
the effort when the Asian financial crisis hit in 1997, with officials
fearing that China would devalue and prompt even deeper depreciations of
currencies in Indonesia, South Korean, Thailand, the Philippines and
elsewhere in Asia. At that moment, the U.S. saw China's fixed currency as an
anchor of stability.

That was then. Like its Clinton predecessors, the Bush economic team
believes the world economy works much better when exchange rates among major
nations are flexible, and parts of the team believe China is supercharging
its export machine by keeping the yuan low. It regularly tells the Chinese:
Over time, as you open your economy to the world, you will want to have a
more flexible exchange rate. That's a prediction and that's our desire.
Chinese economic policy makers reply privately: We know this arrangement
won't last forever.

Then nothing happens, and the two sides recite the same lines when they meet
again. This could go on for a while. The Chinese have plenty of reason to
delay, and the U.S. has few compelling arguments why letting the currency
float or rise would be in China's interest right now. The White House also
has higher priorities, such as getting China to help keep North Korea out of
the nuclear-arms export business.

It's not just textbook-hugging economists who are pushing this into Mr.
Snow's briefing books. Domestic politics are pushing the same way.

A stronger Chinese currency, of course, would tend to restrain the growth of
its exports and limit the speed of the inevitable increase in the global
market share of China's manufacturers. That's one big reason China long has
resisted outside pressure to let its currency rise, and a reason that some
big U.S. multinationals that invest and manufacture in China are happy with
the status quo.

But it's also a big reason why some Bush administration officials -- acutely
aware of the weakness of U.S. manufacturers in states that will be key to
the 2004 election -- are pushing the issue now. Not only would it help U.S.
exports compete against China's, but it would help them compete against
other Asian economies, too. China's neighbors won't allow their currencies
to rise too much against the dollar as long as arch-competitor China is
holding firmly onto its currency. If this stuff isn't on the to-do list of
Mr. Bush's political ace Karl Rove, it will be soon.

All this has some intriguing parallels to Japan, not all of them comforting.
"Japan kept the yen undervalued for a long a time, and the U.S. acquiesced
for a long time," says Clyde Prestowitz of the Economic Strategy Institute,
a Washington think tank. But in 1971, worried about U.S.'s deteriorating
international competitiveness, Richard Nixon muscled Japan to let its
currency appreciate. The yen rose 17% that year, and further later that
decade. Stanford University economist Ronald McKinnon argues the relentless
U.S. pressure to get the yen up contributed to Japan's financial mess of the
1990s. The one sure parallel is this: The U.S., once preoccupied with
Japan's exchange rates and economic prowess, is going to be talking about
China in similar terms for the next several years.