Economy

Revaluing the renminbi

By Mark Hughes (China Daily)
Updated: 2010-03-10 08:11

Determining the value of the yuan is an imperfect science like all challenges to do with the economy. There are many variables and at the heart of the matter is the fallible human being.

On the global stage, nations' employment skills differ, labor costs do not match and can vary widely, what is produced, what is consumed and what is needed can be vastly different. Also, the size of a country's population can play an important role.

One need only look at the euro and the state of Greece's economy to see how discrepancies between countries can have a dramatic effect.

At the end of the day, the value of a nation's currency is a sovereign matter and if it gets it wrong it can pay an almighty price.

In a perfect world, the world to which we all aspire, one that appears within our reach but forever beyond our grasp, there would be agreement. Even agreement to differ.

However, the noise about the value of the yuan has become a clamor, threatening to drown out rational debate.

The major reason for that is that it has become embroiled in that other fallible human science, politics.

It is particularly vociferous on the side of the United States, where certain strongly-positioned factions believe making the yuan stronger would solve that nation's current economic woes. It would make US imports to China cheaper and Chinese exports to the US more expensive, thereby affecting the demand of consumers and tilting the balance of payments in favor of America.

Many economists both in the US and in China regard that as a simplistic view: Americans want what a lot of Chinese companies can supply and which their own businesses do not; the Chinese are mainly interested in high-tech products produced in the US but banned from sale to China. Any increase in the cost of Chinese goods, which tend to appeal to the less well-off in the States would effectively be a retrogressive tax on the poorer elements of society. By its nature, the world of politics tends to take a short term view of issues but good economics should always consider the longer term.

Nonetheless, some economists in China argue that a higher-priced yuan in the longer term would be a good thing for China. They argue against a sudden and large hike, fearing it would drive up inflation, causing social unrest, prick the property bubble, bring to a sudden halt all the development spurred on by the 4 trillion yuan fiscal stimulus, hurt farmers with cheap food imports and general cause mayhem in a relatively inexperienced banking industry. Furthermore, China's massive holding of US Treasury securities would be devalued.

What is needed to balance currencies is a paradigm shift in the nature of humans. One of the fundamental differences between the US consumer and his Chinese counterpart is that the former tends to be debt-heavy while the latter is savings-heavy. The respective economies would be more balanced if US citizens borrowed less and saved more while China's population did the reverse. Only then could an appropriate value for the yuan be more accurately determined. In order to encourage more saving in the US and less borrowing, interest rates would have to rise. That is an economic adjustment filled with political consequences.

The waters have also been muddied by two recent political events that seemed designed to antagonize China: the recent sales of arms to the province of Taiwan and US President Obama's decision to see the Dalai Lama. The first appeared to be a blunt short-term fix to improve US exports. The second seemed unnecessary at this time. For all his other attributes, the Dalai Lama is not going to solve the problems facing the world.

We must also not forget Japan's experience. That country was put under pressure to revalue the yen in 1985 in the face of a massive imbalance of trade with the US. As a result, the dollar fell from 240 yen to 160 over two years. It caused growth in Japan to slow and forced the government to increase spending and lower interest rates. In turn a real estate bubble formed and a business slump remains in effect to this day. However, the trade surplus was largely unaffected.

In conclusion, a stronger yuan would reflect China's strengthening and increasingly significant economy. At some stage it may need to replace the dollar as the international currency marque. But first many bridges have to be crossed. Many variables have to be analyzed and caution must be the buzz word. The future of China's stability lies between a rock and a hard place. Nothing should be done dramatically and suddenly. China's Premier Wen Jiabao must maintain his resolve that the country will not bow to outside pressure.