What if China heeded U.S. advice and jacked up the yuan but its trade surplus
failed to shrink?
Some economists are coming around to the view -- increasingly expressed in
Beijing -- that the structure of China's trade makes the surplus largely immune
to the classical prescription of a stronger exchange rate.
So while a rise in the yuan, or renminbi, would help China to rebalance its
economy and soak up excess liquidity, it might make scant difference in the
short run to a surplus that tripled in 2005 to $102 billion and has risen
another 55 percent so far this year.
"The impact of the yuan on trade is overstated," said Glenn Maguire, Asia
economist for French bank Societe Generale.
"There's a growing recognition by central banks across Asia that foreign
trade isn't as sensitive to movements in foreign exchange rates as it was just 3
or 4 years ago," Maguire said.
The explanation for the shift: globalisation.
So much manufacturing capacity has moved to China that foreign-owned firms
now account for 51 percent of China's trade surplus, up from 3 percent in 2000,
according to Lehman Brothers.
A typical multinational company exporting consumer electronics from China
assembles its products from chips, components and casings imported from across
Asia that would all become cheaper if the yuan were revalued.
Relatively little value is added in China, so a leap in the yuan would lead
to just a small rise in the dollar price of labour and other fixed local costs.
"Thus, a large renminbi revaluation might not dent its trade surplus much:
any loss of export competitiveness could be partly overcome by passing on the
cheaper cost of imported inputs," Lehman economists Rob Subbaraman and Mingchun
Sun said in a note.
NOT WHAT THE TEXTBOOKS SAY
Stephen Green, senior economist with Standard Chartered Bank in Shanghai,
goes further, illustrating in a hypothetical example of trade in laptops that a
20 percent yuan revaluation would actually increase China's processed trade
surplus by 11.6 percent.
"In other words, in the processed sector, yuan appreciation has exactly the
opposite reaction to what the theory predicts," he said in a research note.
Green makes a number of assumptions, including that a 1 percent yuan rise
reduces the volume of Chinese goods sold in rich-country markets by 1 percent;
that processing firms can defend their dollar margins; and that other Asian
currencies do not appreciate in tandem with the yuan against the dollar.
This last assumption, he admits, is unreasonable. But even a simultaneous 35
percent jump in the yuan and other Asian currencies would cut China's processing
trade surplus -- in Green's laptop example -- by just 5.3 percent.
That would be far too small to be meaningful as processing trade had a
surplus last year of $143 billion, Green said.
By contrast, China's "real" trade sector ran a deficit -- as would be
expected of a developing country -- of $40.4 billion, reducing the overall
surplus to a bit more than $102 billion.
"Real" trade refers to conventional importing and exporting by domestic
firms.
"We think there is a good case for believing that yuan appreciation could
exacerbate the surplus in the short term and maybe that short term could last
1-2 years," Green said.
"Appreciation will only have a significant impact upon China's trade surplus
if it induces manufacturing, both processing and 'real', to move offshore -- and
this relies upon alternative locations becoming competitive. China's imbalances
are going to get worse before they get better," he said.
Subbaraman and Sun at Lehman said appreciation of the yuan might not have
much impact, but it was still desirable.
"It would lessen the chances of protectionism against China, which would hurt
China's exports (and imports), and the overall economy. It would also help to
equilibrate capital flows, giving the central bank more room to raise interest
rates without attracting 'hot money' inflows," they wrote.
