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Pushing for 'quick fix' in currency value is no fix
By Suzanne Meyer |
May 20, 2010, Thursday
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Print Edition
Print Edition
THE potential negative impact of revaluating the yuan should not be ignored.
It is easy for the rest of the world and in particular the US to put China under increasing pressure to let its currency start to strengthen again after being virtually pegged to the dollar since mid-2008.
But why should China be made to move? Other countries have also taken measures to weather the global financial crisis in their home markets. China's first priority is to take care of its own market. The global financial crisis is not over and China is understandably still concerned about the outlook for exports.
In March China recorded a trade deficit of about US$7 billion, the largest in six years, as imports soared 66 percent year-on-year to US$119 billion and exports climbed 24 percent to US$112 billion from 2009's weak base.
While China had a US$9.9 billion surplus with the US, this was offset by large deficits with commodity exporters and Asian countries.
The last time China began to allow its currency to strengthen in 2005, it helped fuel a huge bull market in Asian stocks. The revaluation in 2005 had no impact what so ever on the trade surplus. A stronger yuan could boost other Asian currencies, lift commodity prices and hurt US Treasury debt.
The US complains about the trade deficit and has called on China's leaders to unshackle the currency amid bitter complaints in Congress that it is being manipulated.
But the US is also a beneficiary. A stronger yuan could lead the Chinese and other Asian governments, with fewer dollars on their hands, to buy less US debt. Worries of reduced demand from China could result in a short-term sell-off and increased financing costs for the US.
Letting the Chinese currency appreciate against the dollar will neither ease trade imbalances between the two countries nor decrease unemployment in the US.
A gradual appreciation of the yuan will just encourage speculative inflows and therefore actually add to excessive liquidity (via central bank intervention) rather than reduce it. With all the government financing that needs to be done in Western Europe and the US in lieu of financial crisis, this could negatively impact available liquidity for investments.
China's trade surplus is more due to the forces of globalization than that of an undervalued yuan. Putting the pressure on China to allow a stronger Chinese currency and claiming this is "absolutely critical for the equilibrium of the world economy" is looking for a quick fix.
(Suzanne Meyer, a participant in IMD's Executive MBA class of 2010 and head of International Corporate Business Management for Commerzbank in Germany)
It is easy for the rest of the world and in particular the US to put China under increasing pressure to let its currency start to strengthen again after being virtually pegged to the dollar since mid-2008.
But why should China be made to move? Other countries have also taken measures to weather the global financial crisis in their home markets. China's first priority is to take care of its own market. The global financial crisis is not over and China is understandably still concerned about the outlook for exports.
In March China recorded a trade deficit of about US$7 billion, the largest in six years, as imports soared 66 percent year-on-year to US$119 billion and exports climbed 24 percent to US$112 billion from 2009's weak base.
While China had a US$9.9 billion surplus with the US, this was offset by large deficits with commodity exporters and Asian countries.
The last time China began to allow its currency to strengthen in 2005, it helped fuel a huge bull market in Asian stocks. The revaluation in 2005 had no impact what so ever on the trade surplus. A stronger yuan could boost other Asian currencies, lift commodity prices and hurt US Treasury debt.
The US complains about the trade deficit and has called on China's leaders to unshackle the currency amid bitter complaints in Congress that it is being manipulated.
But the US is also a beneficiary. A stronger yuan could lead the Chinese and other Asian governments, with fewer dollars on their hands, to buy less US debt. Worries of reduced demand from China could result in a short-term sell-off and increased financing costs for the US.
Letting the Chinese currency appreciate against the dollar will neither ease trade imbalances between the two countries nor decrease unemployment in the US.
A gradual appreciation of the yuan will just encourage speculative inflows and therefore actually add to excessive liquidity (via central bank intervention) rather than reduce it. With all the government financing that needs to be done in Western Europe and the US in lieu of financial crisis, this could negatively impact available liquidity for investments.
China's trade surplus is more due to the forces of globalization than that of an undervalued yuan. Putting the pressure on China to allow a stronger Chinese currency and claiming this is "absolutely critical for the equilibrium of the world economy" is looking for a quick fix.
(Suzanne Meyer, a participant in IMD's Executive MBA class of 2010 and head of International Corporate Business Management for Commerzbank in Germany)
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