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Calls to revalue yuan grow louder
Paul Lin
9/22/2003



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Calls for China to revalue its currency have been heard internationally since the end of last year. Before that, China was repeatedly called "the factory of the world." Obviously, its rapid growth in exports has led to the pressure for the yuan to appreciate. China's trade surplus with the US has already exceeded US$100 billion, and its foreign exchange reserves have exceeded US$300 billion. Both provide a basis for such calls. Since the outbreak of SARS did not affect these figures too much, the pressure has become even greater now.

The pressure reached its climax when US Secretary of the Treasury John Snow visited Beijing this month. But both parties kept a low profile on the issue. Chinese Premier Wen Jiabao promised that China will move toward a more flexible currency system.

Nevertheless, there is no timetable for his promise, which solely depends on the Chinese leaders. This is just like saying that China agrees to carry out democracy, but in a "gradual" way. Hence, many US senators proposed a draft bill, demanding that the US increase the customs duties on China-imported goods by 27.5 percent, forcing Beijing to give up its policy of pegging the yuan to the US dollar. The proposed exchange rate in fact matches with experts' estimates, which suggests that the yuan has been undervalued between 17 and 40 percent.

The Chinese people's and some ministerial officials' reaction to the pressure is stronger than that of Wen. They have taken this opportunity to further arouse anti-US, nationalistic sentiment. Indeed, every country's monetary policy is based on its own interests. But it can not ignore international reaction and still globalize. Such international pressure comes not only from the US but also from Japan, Europe, and even some developing countries.

But countries like Japan have hesitated to speak up due to their fear of China. Developing countries find it difficult to compete with China because it reduces trade deficits with developed countries. In fact, the appreciation of the yuan will also help both Taiwan and Hong Kong reduce capital outflow and boost their ailing real estate industries.

Nine years ago, China drastically and repeatedly cut the yuan's exchange rate within one year. Its foreign trade has grown significantly today, which has also boosted its economic development. Thus, its economic power is much stronger compared to the past.

Facing the global economic downturn, China still outshines others thanks to an exchange rate that has been tightly pegged to the US dollar for years. This is the main reason behind the demand for the yuan's appreciation. China is able to remain the "factory of the world" thanks to the countless cheap laborers who do not know how to fight for their rights.

In the 1980s, the Chinese Communist Party (CCP) proposed different views on Mao Zedong's population theory, saying that Mao's idea of "the greater population the better" may damage China's economic development. However, China floods the world's export market with its "human sea" tactic proposed by Mao in the 1950s: to use a massive labor force to strengthen the economy. How ironic that Mao's legacy is having an effect again.

Beijing insists on not revaluing the yuan because it's afraid that the appreciation may weaken its competitiveness, decrease its annual economic growth and increase the unemployment rate, which will cause social instability. It's also afraid that exchange-rate speculations may shake and even collapse its seriously-ill financial system.

However, standing up to the pressure does not mean that the problem does not exist anymore, because China is also merging into the global market. As a result, it's estimated that over US$20 billion speculative hot money has already flooded into China, waiting to profit from the exchange rate differentials after the future appreciation.

Beijing's hardline attitude has not yet scared away foreign investors, who have put their money into China's real estate and stock markets, making the bubble bigger and bigger while causing financial instability. The Chinese government has tried to reduce the pressure by issuing US-dollar-denominated bonds, allowing enterprises to purchase such bonds freely, and relaxing the limit on the amount of cash that each individual could take out of China. But these methods can only solve a small part of the problem.

Today, both the US government and some US investment banks are pressuring China to move toward a free-floating exchange rate. This is perhaps more justifiable than simply demanding a revaluation. This is also the issue that China cannot avoid in the process of its globalization. Due to China's policy of pegging the yuan to the US dollar, even a liberal and open financial center like Hong Kong is facing certain structural problems from which it can hardly free itself. Such a policy even caused a financial crisis in Argentina. What will happen to China?

China initially benefited from its WTO entry but may suffer later. It obtained all the free-trade rights instantly, and its obligations (such as the reduction of customs duties) will not come for three to five years. Therefore, the situation seems bright during its honeymoon with the WTO. But if Beijing does not seize the chance to implement systemic reforms, including financial reforms, the outcome may be unbearable to think once the pressure grows further.

*Paul Lin is a political commentator based in New York.

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