China's revaluation of the yuan: Is it a yawn or for real?
President Obama鈥檚 past warning that China cannot just keep 鈥渟elling everything to us鈥� may have become partially true this week.
On Monday, China started a new flexibility in its currency exchange rate. This may finally signal that the world鈥檚 third- largest economy wants to be a responsible player in the global financial system rather than keep on manipulating its currency in order to remain the world鈥檚 factory for low-priced exports.
It may also signal that China鈥檚 Communist Party may be starting to trust its citizens to make their own economic decisions.
The currency shift will allow Chinese goods to become more expensive in the US (thus partly meeting Mr. Obama鈥檚 wish) but also help boost American exports to China 鈥� creating more jobs in the US (an even more important Obama goal this year).
How many US jobs might be created by a Chinese currency shift?
If the yuan (also known as the renminbi) is allowed to increase in value by 20 percent, that could produce as many as 1 million US jobs, according to one leading expert. But such a large shift will likely not happen soon. For now, China had made only a vague promise to be flexible in its controls over yuan trading. In fact, many experts forecast the new policy will lead to only a 2 to 4 percent change this year.
If true, that would likely not be enough to satisfy those in Congress who want China to end this mercantile system, one that has come at the expense of American workers who have lost their jobs because of inexpensive Chinese imports.
These critics say the yuan needs to change as much as 40 to 50 percent to reflect its free-market value. A bill in Congress would slap tariffs on Chinese imports until China allows such free trading 鈥� a threat of trade protectionism with serious repercussions. US Secretary of the Treasury Timothy Geithner, in fact, says the test for China now is 鈥渉ow far and how fast they let the currency appreciate.鈥�
The timing of China鈥檚 announcement, however, indicates it may be merely a political move to fend off foreign pressure rather than a real change of heart in its economic approach. The announcement came just days before a summit in Canada of the Group of 20 leading industrial economies (which includes China). And it also comes as US lawmakers start to campaign for reelection.
Still, China鈥檚 central bank did cite the new policy鈥檚 benefits for China itself, such as how it would help rein in inflation and reduce the country鈥檚 high dependence on exports for growth.
China has dug itself into a trap by following Japan鈥檚 growth model, or the use of nonmarket means to boost exports. It is now highly dependent on the US and Europe and, when those markets either collapse in recession or rebel against China鈥檚 tactics, that economic strategy becomes vulnerable.
What is needed is a shift to a vibrant domestic economy that can lift up more of China鈥檚 peasants and stabilize the country. Protests among factory workers are rising, a sign of increased volatility in China鈥檚 exports-first policy.
Becoming a mature economy means China must adopt market principles that are sustainable and open. A controlled economy only creates distortions that are not sustainable.
