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Revalued RMB: The Illusion of Choice

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1 Revalued RMB: The Illusion of Choice on Tue Mar 30, 2010 3:58 pm

littlekracker


[CEG Original] Revalued RMB: The Illusion of Choice
Published: March 30, 2010


by Andrew Carson

“I don’t think the RMB is undervalued,” said Chinese Premier Wen Jiabao in a recent press conference following the closing of the National People’s Congress. This comment comes after renewed international pressure on China to appreciate its national currency, as it is widely assumed to be at least 40% undervalued. Europe, the US, and even the developing Brazil have recently begun to step up demands on the RMB. In February, President Barack Obama went so far as to guarantee a tougher stance in future trade disputes with China and on overall Chinese monetary policy, which Beijing brushed off as mere campaign talk. However, with a 277 billion dollars trade deficit and increasing unemployment, the US export industry could really use a hand, as the unforgiving RMB continues to cut into the bottom-line.

Unfortunately, China doesn’t seem willing to give much ground, as Premier Wen Jiabao commented, ”A country’s exchange rate policy and its exchange rates should depend on its national economy and economic situation.” During the closing ceremonies of the People’s Congress, Premier Wen Jiabao very clearly explained that this year was for stability and maintaining the economic ground gained in the past year, hinting at no change in the RMB.

The Yuan’s rise decent to power

The Chinese Yuan has had a long history with the US Dollar. Before 2010, The Yuan’s value had been tied to the USD for many decades, which promoted stability and financial confidence. However in 2005, the connection was severed and the Yuan was allowed to close in on the US dollar by about 20 percent. This practice was suddenly brought to a halt on the on the heels of the global financial crisis. China immediately inoculated itself with 4 trillion Yuan stimulus and pegged the RMB back onto the US dollar at a constant rate of 6.82, a decision that Premier Wen called “temporary.” These emergency financial measures were all part of an effort to protect the Chinese market from the falling export demand from abroad.

Opinions aside, this year China was the envy of every country. During many months of global downturn and economic frustration, China enjoyed an unprecedented 8 percent growth in GDP. Where other countries experienced shrinking markets, China has experienced solid growth fueled by its dependence on exported goods. This was probably the most important year of the past century for China; as the world market was put on pause, China leaped ahead.

The Diagnosis: Split Personality Syndrome

As the 4 trillion Yuan stimulus slowly phases out, more and more people are beginning to question the “temporary” US peg of the RMB. China now has two options, which has slowly been creating a rift in China’s political base. While Premier Wen Jiabao obviously supports a stable Yuan as to prevent “double dipping” (i.e. a second recession), China’s Central Bank Chief Zhou Xiaochuan was quoted as considering “exiting the special policies introduced to weather the financial crisis,” which would mean the Yuan peg. This rift seems to be forming along the lines of senior politicians of China and the financial wizards, as both look at the problem through different lenses.

Senior politicians, who are for a stable Yuan, are considering the issues of domestic concerns and public approval. Over the past year, China could not help but develop hubris and national pride, viewing the failure of western markets as weakness. China has always had a very sensitive ego and to back down against western demands would be close to political suicide. “It will be very difficult for Chinese authorities to justify why they are allowing the currency to appreciate now,” Citigroup economist Ken Peng explained to the Associated Press. “Appreciation is still viewed as some sort of a concession.” In an effort to combat this, recent announcements in the state press feature government researchers talking about revaluation and the possible benefits for the Chinese people. Clearly the government is attempting to smooth over the inevitable revaluation of the Yuan.

China’s financial wizards, however, are more global in their thinking and foresee the benefits of a stronger Yuan. They understand that a stronger Yuan would control inflation, reduce dependence on exporting abroad and create domestic competition. From an economic point of view, the financial wizards are correct. A stronger Yuan would be much more advantageous to China’s economic future, though the immediate effects might cause some social tensions and public backlash, as it would be perceived publicly as a “backing down.” The long-term effects, however, would be much more stabilizing than China is willing to admit. In essence, a more valuable RMB would tighten the door on exports, upon which China has become much too dependent, and would help the country focus on domestic economic development.

Lowering the Yuan during the financial crisis dramatically stabilized China’s export industry but also allowed some erosion and atrophy in China’s inner homegrown markets, as companies rushed in to take advantage in coastal cities. This however would be curtailed and a more self-sustaining China would emerge, with boosted household spending, especially in poverty-stricken central china.

The Last Straw

The US is slowly being driven to use the measures of last resort, as the RMB continues to sour in an already aching US economy. Just last week, President Barack Obama called once again for China to consider a “market oriented” exchange rate, to help even out global trade. Without a doubt, the effects of the RMB are very far reaching. Every country in the world feels the effects of both the undervalued RMB and China’s very narrow margins. While China’s State-run media argued it has allowed the west to enjoy low inflation and a low cost of living, the negative effects are too significant to ignore. These effects, some argue, have even started to counter-act the US’s billion-dollar stimulus, which seems to be the final straw.

As China hems and haws over its decision, delicately stringing along the hopes of the world economy, the US finally presses forward calling for official action. Ever since 2005, the US has been nervously fidgeting over a little red button, which could bring about swift, irreversible change. However, this button does not come without its drawbacks, as it would have major repercussions for future Sino-US relations. While previous administrations have decided to ignore this option, five senators have begun working on a bill to that would compel its use.

The little red button, if pushed, would force the US treasury to declare the RMB a manipulated currency, which would most certainly lead to a formal complaint for the World Trade Organization. This in turn could lead to embargos on Chinese goods, or even additional tariffs for those that pass US ports. The New York Times quotes one of the five senators, “I believe the Chinese don’t believe in free trade, I believe they’re mercantilist, that they simply want to increase their economic power and will do whatever it takes to do that.” Whether this bill comes to fruition or not, China and the US will have to meet face to face during the June meeting of the US-China Strategic and Economic Dialogue and discuss the problem of the RMB.

A False sense of choice?

Many economists have agreed that a stronger Yuan would mean more jobs in the US, along with stronger exports. However the question remains: has China overstepped the line and underestimated its position of power in the world? Recently returning fire against the US, Premier Wen Jiabao commented on China’s investment in US debt, stating: ”In the press conference last year, I said I was a bit concerned about it. This year, I make the same remark. I am still concerned. I hope the U.S. will take concrete measures to assure its investors.” Such an emboldened China, using such aggressiveness, has drawn increased attention and criticism from a world audience.

As Ambrose Evans-Pritchard, international business editor for The Telegraph so quaintly puts it, “Is the [Chinese] Politburo smoking weed?” Indeed, China’s rapidly growing market seems to have caused a rush of blood to the head. Do leaders really think they possess enough bargaining chips to force their economic agenda, without so much as a consult from the outside world?

When it comes down to it, China is going to eventually give in to outside powers and revalue the RMB. As China may need to be reminded, many countries outside the western-axis-of-power, such as Japan, Egypt and Brazil, have all decried Beijing’s methods. China will not be giving in to US demands, or even Western demands, but rather demands from an international community.

2 Re: Revalued RMB: The Illusion of Choice on Tue Mar 30, 2010 5:49 pm

Guest


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“I don’t think the RMB is undervalued,” said Chinese Premier Wen Jiabao

BLAH BLAH BLAH....IMF CHIEF says!! your undervalued....deal with it and RV!

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