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Behind the US pressure to persuade China to revalue its currency
Source: Xinhua |
February 24, 2010, Wednesday
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Print Edition
Print Edition
US political rhetoric has recently been obsessed with the exchange rate of the renminbi, or yuan.
President Barack Obama has indicated on several occasions that he would take a tougher stance on this issue in order to address trade imbalances between his country and China.
While addressing Democratic senators early this month, Obama said the issue of the yuan exchange rate must be addressed to ensure that American products will not be put into a huge competitive disadvantage given the fact that China is going to be one of America's biggest markets.
In an interview with Businessweek on February 10, Obama said he and Chinese leaders are going to have some "very serious negotiations" on the exchange rate issue.
Supporters of Obama include economists such as Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. Those experts say China's huge trade surplus is a result of an undervalued yuan. Appreciation of the Chinese currency, in their view, would re-balance China's international trade.
However, the validity of such argument is questionable.
The Japanese yen, for example, has been appreciated enormously against the US dollar over the past 40 years. Yet Japan's trade surplus with the United States has been continuously on the increase over the same period.
Trade surplus
The case with the Japanese yen has clearly demonstrated that international payment is not necessarily entirely linked to currency exchange rates.
Stephen King, chief economist of the HSBC bank, said it is unreasonable to simply attribute China's big trade surplus to an undervalued currency. China's high savings rate is a more important factor in this respect, he told Xinhua.
Nobel Prize laureate Andrew Michael Spence shared King's argument.
"Reducing the surplus in China involves deep structural change, much as reducing the US deficits does. China's high savings are embedded in the structure of the economy," Spence wrote in the Financial Times on January 21.
Without structural change, an appreciation of the yuan might well lead to continued high savings and slow economic growth in China, rather than to a reduction of China's trade surplus, he wrote.
International Monetary Fund (IMF) chief economist Olivier Blanchard believes that Chinese currency appreciation is not a solution for the US economy.
According to an IMF model, the American GDP will grow by 1 percent when the yuan appreciates by 20 percent and other major Asian currencies also appreciate by a similar margin, he told Xinhua.
"This would be good news for US growth. But this is clearly not enough by itself to sustain growth in the United States," said Blanchard.
China bashing
Obama has frequently attacked China over the currency issue in recent months. His motives are thought-provoking.
In an article titled "Obama bashes China in order to win midterm elections," Japanese weekly Choice pointed out that after one year in office, the US president now faces a sharp drop in approval ratings, a double-digit unemployment ratio and the loss of Democratic "super majority" in the Senate.
Trying to win the midterm elections under such circumstances, Obama had moved toward a "China-bashing" policy since the end of last year, including imposing high tariffs on Chinese products and pressuring China on the yuan exchange rate.
But the truth is China has become the largest victim of US trade protectionism since the outbreak of the global financial crisis.
According to statistics released by the United States International Trade Commission, there were roughly 50 trade remedy cases filed by the United States between January and November 2009, half of which targeting China.
At the end of last year, Chinese Premier Wen Jiabao said in an exclusive interview with Xinhua that some foreign countries kept asking China to appreciate its currency while using various protectionist measures against China.
Their real motive was to contain China's growth, he said.
Wen reiterated that China will never yield to external pressures on the exchange rate issue.
In essence, a country's exchange rate policy is a matter of sovereignty.
President Barack Obama has indicated on several occasions that he would take a tougher stance on this issue in order to address trade imbalances between his country and China.
While addressing Democratic senators early this month, Obama said the issue of the yuan exchange rate must be addressed to ensure that American products will not be put into a huge competitive disadvantage given the fact that China is going to be one of America's biggest markets.
In an interview with Businessweek on February 10, Obama said he and Chinese leaders are going to have some "very serious negotiations" on the exchange rate issue.
Supporters of Obama include economists such as Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. Those experts say China's huge trade surplus is a result of an undervalued yuan. Appreciation of the Chinese currency, in their view, would re-balance China's international trade.
However, the validity of such argument is questionable.
The Japanese yen, for example, has been appreciated enormously against the US dollar over the past 40 years. Yet Japan's trade surplus with the United States has been continuously on the increase over the same period.
Trade surplus
The case with the Japanese yen has clearly demonstrated that international payment is not necessarily entirely linked to currency exchange rates.
Stephen King, chief economist of the HSBC bank, said it is unreasonable to simply attribute China's big trade surplus to an undervalued currency. China's high savings rate is a more important factor in this respect, he told Xinhua.
Nobel Prize laureate Andrew Michael Spence shared King's argument.
"Reducing the surplus in China involves deep structural change, much as reducing the US deficits does. China's high savings are embedded in the structure of the economy," Spence wrote in the Financial Times on January 21.
Without structural change, an appreciation of the yuan might well lead to continued high savings and slow economic growth in China, rather than to a reduction of China's trade surplus, he wrote.
International Monetary Fund (IMF) chief economist Olivier Blanchard believes that Chinese currency appreciation is not a solution for the US economy.
According to an IMF model, the American GDP will grow by 1 percent when the yuan appreciates by 20 percent and other major Asian currencies also appreciate by a similar margin, he told Xinhua.
"This would be good news for US growth. But this is clearly not enough by itself to sustain growth in the United States," said Blanchard.
China bashing
Obama has frequently attacked China over the currency issue in recent months. His motives are thought-provoking.
In an article titled "Obama bashes China in order to win midterm elections," Japanese weekly Choice pointed out that after one year in office, the US president now faces a sharp drop in approval ratings, a double-digit unemployment ratio and the loss of Democratic "super majority" in the Senate.
Trying to win the midterm elections under such circumstances, Obama had moved toward a "China-bashing" policy since the end of last year, including imposing high tariffs on Chinese products and pressuring China on the yuan exchange rate.
But the truth is China has become the largest victim of US trade protectionism since the outbreak of the global financial crisis.
According to statistics released by the United States International Trade Commission, there were roughly 50 trade remedy cases filed by the United States between January and November 2009, half of which targeting China.
At the end of last year, Chinese Premier Wen Jiabao said in an exclusive interview with Xinhua that some foreign countries kept asking China to appreciate its currency while using various protectionist measures against China.
Their real motive was to contain China's growth, he said.
Wen reiterated that China will never yield to external pressures on the exchange rate issue.
In essence, a country's exchange rate policy is a matter of sovereignty.
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