Time to reveal truth about China's yuan debate
2010/09/15

BEIJING, Sept. 15 (Xinhua) -- Time and time again and with the excuse of the self-proclaimed "for the benefit of America," some U.S. lawmakers and business groups clamor for increased pressure on China to revalue its currency. When times turn tough, the weary argument finds even more traction.

This time, as many as 132 Democrats are finding their "right time" to lodge such an assertion as the U.S. trade deficit with China rises rapidly and the unemployment rate hovers at close to 10 percent across America. A tough stance on China's exchange rate now could play well during the coming mid-term elections.

The lawmakers have labeled China a "currency manipulator" and demand that Beijing let the Chinese yuan, or Renminbi, appreciate to balance its trade and narrow the huge deficit.

Their efforts are attempting to make China an easy scapegoat for America's economic woes and are in no regard to the fact that the value of the yuan has increased by up to 20 percent since 2005.

The Americans should be bold enough to put the responsibility for creating the trade imbalances on their own shoulders instead of trying to cast blame on others. The entire world knows the United States doesn't bank much money and counts on the world's savers, such as China, to run large current accounts and trade surpluses to provide America with capital.

Applauding Treasury Secretary Timothy Geithner's recent decision to not label China as a currency manipulator, Stephen Roach, chairman of Morgan Stanley Asia, said the bulk of China's foreign exchange reserves helps fund the massive U.S. savings shortfall.

Roach warned that a reduced buying of goods from China, America's largest foreign lender, would put sharp downward pressure on the dollar and possibly trigger a dreaded double dip in the U.S. economy. That, Roach said, could create turbulence in the fragile economic recovery.

Instead, the answer to U.S. trade imbalances lies in structural reforms. But regrettably, the changes necessary to produce such reforms cannot occur overnight.

There are two common options in government policies to curb trade imbalances: adjusting the exchange rate or turning to protectionism. The past two years have seen China falling victim to U.S. protectionist measures adopted in the wake of the global financial crisis.

The motives for the mounting pressure on China over the yuan have been widely questioned, even in the United States. As the U.S. mid-term elections approach, the political clamoring will expectedly turn increasingly shrill.

Many wonder if the lawmakers are really speaking against China for the benefit of Americans or only out of their selfish desire to please their constituents and gain more votes ahead of the coming elections. A common view is that, to some extent, the lawmakers are looking to improve their public image in an effort to pocket more political capital.

On Tuesday, 36 U.S. farm and business groups, including the U.S.-China Business Council, the American Soybean Association and the American Meat Institute, urged the Congress not to pass any legislation threatening China with new duties if Beijing does not revalue the yuan.

"Estimations of the correct currency value would be inherently subjective, unilateral and potentially politicized since there is no agreed upon method to determine what a country's exchange rate should be in the absence of a market-based determination," the groups said.

Another reason to question the lawmakers' motives is based on the credibility of the data they cite in accusing Beijing of undervaluing the yuan by 24 percent to as much as 40 percent.

The figures the lawmakers cite were drawn from previous IMF predictions that China's current account would represent 8 percent of its gross domestic product by 2015. Based on that prediction, the Chinese yuan needs to appreciate 24.2 percent to achieve the current account/GDP target ratio of 3 percent.

Please forget the predictions that always vary widely from what happens in reality. China's real current account represented 6 percent of its yearly GDP in 2009, a figure that means the yuan needs only to appreciate 10 percent to reach the target ratio of 3 percent.

The true situation this year shows China does not need to revalue the yuan at all, considering China's decreased trade surplus during the past nine months and a likely drop in its current account/GDP ratio to below 4 percent.

At the same time, many people worry that the yuan issue could spark a trade war between the world's two largest economies and trigger a spate of protectionism that might endanger the fragile global economic recovery.

Past experience shows that global peace and prosperity is impossible without China's participation, and as the world's biggest developing country, China cannot develop itself without the help of other countries.

Therefore, the U.S. should rein in those congressmen yapping for Beijing to revalue the yuan and join hands with China to build a positive, cooperative and comprehensive relationship for the 21st century.

 

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