More Anger on Yuan: Emerging-Market Voices Raise Odds on Yuan Move
April 23rd, 2010
(WSJ MICHAEL CASEY) -Critics of China’s foreign-exchange policy finally have some allies that matter: Brazil and India.
Until now, the call for Beijing to revalue its currency, the yuan, has been dominated by U.S. voices, and not particularly constructive ones: Senator Charles Schumer (D., N.Y.), for example, who recently admonished Treasury Secretary Timothy Geithner for using “words” rather than “tough action” to sway the Chinese.
If the Obama administration followed Schumer’s advice and imposed trade sanctions against China, it would risk a tit-for-tat protectionist backlash in which nobody wins. What’s more, the strident tone of Schumer’s–and others’–criticism has made Beijing hardliners more reluctant to give in to foreign demands.
Now, just before Chinese economic officials attend meetings with their counterparts from the Group of 20 developed and developing nations in Washington, Beijing is hearing the same appeal–but from sources it will find harder to ignore.
According to the Financial Times, both Indian Central Bank Governor Duvvuri Subbarao and his Brazilian equivalent, Henrique Meirelles, this week have called on China to appreciate the yuan. If Russia pipes up, China will have all three other members of what is known as BRIC group (Brazil, Russia, India and China) of emerging-market nations lined up against it. China can’t dismiss their yuan-appreciation calls as easily as the whinings of the world’s richest nation.
Brazil and India aren’t the only ones, either. Last week, Singapore Prime Minister Lee Hsien Loong said the world needed a stronger yuan. And in a speech in New York Thursday, Bank of Japan Governor Masaaki Shirakawa said China should “eventually” let its currency appreciate. These comments are emerging because China’s exchange rate is indeed out of line. Schumer might be wrong about the solution, but he is right about the problem.
Because the yuan is pegged to the dollar, which has lost considerable ground against most other currencies these past four years, China has developed an unfair competitive advantage over everyone. Think of Mexico. Its economy contracted 6.5% last year, capping a dismal decade in which it struggled to recover the export boom it enjoyed after the North American Free Trade Agreement was implemented in 1994. This can be traced partly to China’s 2001 entry into the World Trade Organization, which meant that Mexican “maquiladora” producers south of the U.S. border suddenly found themselves up against a powerful new competitor in U.S. markets.
Chinese exports now account for around 10% of world trade. Meanwhile, its $2.4 trillion pool of foreign reserves has put it in the awkward role of being a vital source of finance for governments, and not only the U.S.. Both these phenomena arise from the yuan policy, which keeps China’s exports competitive at the same time that it forces the People’s Bank of China to accumulate foreign currency in order to maintain its dollar peg.
The peg means that China is effectively importing the Federal Reserve’s hyper-accommodative monetary policy at the most inappropriate time. An economy growing at more than 11% that has a real estate bubble grabbing headlines daily shouldn’t be adopting the monetary policy of an economy that is facing 9.7% unemployment and is still reeling from a wrenching credit crisis. So, yes, a yuan revaluation is long overdue. The good news is that, with the rest of the world now making that point, a multilateral, negotiated solution seems more viable.
In that scenario, the path toward trade and financial equilibrium looks less treacherous than the one laid out by would-be protectionists in the U.S. Congress. Full: http://is.gd/bF5sV
April 23rd, 2010
(WSJ MICHAEL CASEY) -Critics of China’s foreign-exchange policy finally have some allies that matter: Brazil and India.
Until now, the call for Beijing to revalue its currency, the yuan, has been dominated by U.S. voices, and not particularly constructive ones: Senator Charles Schumer (D., N.Y.), for example, who recently admonished Treasury Secretary Timothy Geithner for using “words” rather than “tough action” to sway the Chinese.
If the Obama administration followed Schumer’s advice and imposed trade sanctions against China, it would risk a tit-for-tat protectionist backlash in which nobody wins. What’s more, the strident tone of Schumer’s–and others’–criticism has made Beijing hardliners more reluctant to give in to foreign demands.
Now, just before Chinese economic officials attend meetings with their counterparts from the Group of 20 developed and developing nations in Washington, Beijing is hearing the same appeal–but from sources it will find harder to ignore.
According to the Financial Times, both Indian Central Bank Governor Duvvuri Subbarao and his Brazilian equivalent, Henrique Meirelles, this week have called on China to appreciate the yuan. If Russia pipes up, China will have all three other members of what is known as BRIC group (Brazil, Russia, India and China) of emerging-market nations lined up against it. China can’t dismiss their yuan-appreciation calls as easily as the whinings of the world’s richest nation.
Brazil and India aren’t the only ones, either. Last week, Singapore Prime Minister Lee Hsien Loong said the world needed a stronger yuan. And in a speech in New York Thursday, Bank of Japan Governor Masaaki Shirakawa said China should “eventually” let its currency appreciate. These comments are emerging because China’s exchange rate is indeed out of line. Schumer might be wrong about the solution, but he is right about the problem.
Because the yuan is pegged to the dollar, which has lost considerable ground against most other currencies these past four years, China has developed an unfair competitive advantage over everyone. Think of Mexico. Its economy contracted 6.5% last year, capping a dismal decade in which it struggled to recover the export boom it enjoyed after the North American Free Trade Agreement was implemented in 1994. This can be traced partly to China’s 2001 entry into the World Trade Organization, which meant that Mexican “maquiladora” producers south of the U.S. border suddenly found themselves up against a powerful new competitor in U.S. markets.
Chinese exports now account for around 10% of world trade. Meanwhile, its $2.4 trillion pool of foreign reserves has put it in the awkward role of being a vital source of finance for governments, and not only the U.S.. Both these phenomena arise from the yuan policy, which keeps China’s exports competitive at the same time that it forces the People’s Bank of China to accumulate foreign currency in order to maintain its dollar peg.
The peg means that China is effectively importing the Federal Reserve’s hyper-accommodative monetary policy at the most inappropriate time. An economy growing at more than 11% that has a real estate bubble grabbing headlines daily shouldn’t be adopting the monetary policy of an economy that is facing 9.7% unemployment and is still reeling from a wrenching credit crisis. So, yes, a yuan revaluation is long overdue. The good news is that, with the rest of the world now making that point, a multilateral, negotiated solution seems more viable.
In that scenario, the path toward trade and financial equilibrium looks less treacherous than the one laid out by would-be protectionists in the U.S. Congress. Full: http://is.gd/bF5sV