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"Unpegging" China's Yuan
Analyzing the Economics in China That Led to the Revaluation of the Yuan- An Interview With He
Xin Fei
8/6/2005



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The Central Bank of China announced it would no longer “peg” Chinese currency (the yuan) to the US dollar as of July 21, 2005. The rate changed from 8.2765 yuan to the dollar to 8.11, which is a 2.1 percent appreciation and revaluation of the yuan. The Epoch Times’ reporter, Xin Fe, interviewed Ms. He Qinglian, a famous economist and a visiting scholar at Princeton University, on July 28. Ms. He analyzed the reason for the yuan revaluation and its influence on the Chinese economy.

Domestic Economic Pressure in That China Forced the Revaluation of the Yuan Up to now, pressure for revaluing the yuan has come from the international community; however, the actual reason for the new rate was the increasing pressure from inside China. The Chinese government had previously opposed revaluing the yuan because it would increase export costs and unemployment. However, in the last two years, negative influences from other economic aspects have gradually appeared, which made the export issue seem less important.

The primary pressure the undervalued yuan causes on the Chinese economy was an increase in surpluses of the current and capital accounts. In recent years, China’s foreign exchange reserves have increased rapidly from $21.2 billion in 1993 to $659.1 billion at the end of March 2005. The first economic pressure caused by the yuan undervaluation was the high import costs of petroleum, iron ore, and lumber, etc. So to lower the import costs and to reduce inflation, China had to consider revaluing the yuan.

The next pressure is that the undervaluation increased the interest cost on foreign loans, which is a disadvantage to the restructuring of China’s industries.

A third pressure is the high volume of currency issued, leading to flows of “hot money” from outside China seeking investment opportunities. The government spends a lot of yuan to buy those dollars, with the money flowing into real estate, and creating a speculative bubble. So for these reasons, the Chinese government considered revaluing the yuan.

The Chinese Government Politicized the Revaluation of the Yuan

In fact, it was the Chinese government, rather than the United States, that made the revaluation of the yuan a political issue. In the past decade, China’s Communist government made the issue extremely political, using a mixture of patriotism and nationalism, along with Communist ideology, to focus the attention of the people.

The three key points used were: “economic development, political stability, and the reunification of the country.” “Reunification” meant opposing the independence of Taiwan and propagandizing the US government as the main supporter of Taiwanese independence. And because the US also criticizes the human rights situation in China, the Chinese government labels it an enemy and the main supporter of an international anti-China coalition. Since the US advocated for a revaluation of the yuan, the Chinese government refuse to do so, lest it be seen as “submitting to US hegemony.” Because of this bias, China missed several good opportunities to revalue its currency and instead, prolonged the problems.

Then why did China revalue the yuan in July? To spite the US Treasury Secretary, John Snow, who anticipated a revaluation in August. As a result, the Chinese government felt its prestige was enhanced and US “hegemony” was decreased.

International pressure was not the primary factor that led the Chinese government to consider revaluation of the yuan. The Chinese government benefits from politicization of the yuan, as it can bargain with the US government, in the same way that it uses political dissidents as bargaining chips.

Impact of the Revaluation of Renminbi (yuan) on China

The appreciation of the yuan is too small to relieve either the internal or the external pressures on the Chinese economy, which will still continue. In the United States, more of a revaluation was expected. Government economists thought the yuan was undervalued by at least 25 percent, and the textile industry’s undervaluation figure was 35 percent. Experts in China thought the undervaluation was around 20 percent. So the US had been hoping for a 10 percent immediate appreciation- the two percent revaluation disappointed everyone. The US Congress said it would continue to pass more bills increasing tariffs on Chinese imports.

Beijing has clearly stated that it will not adjust the exchange rate anytime soon because the Chinese banking system is too weak to do so. Deputy Governor of the People’s Bank of China, Li Deshui, said on July 27 that the yuan will not be freely traded for at least the next five years because, “The banking system in China is too weak. The currency system in China has not yet reached international standards.”

The revaluation has impacted the textile industry the most because this industry requires almost no special technology and depends on a low pricing policy. A five percent increase in the yuan will exclude from the market 60 to 70 percent of the small to mid-sized textile companies that have no brand names or special technology and depend on the low prices of their products to maintain sales. It has been estimated that a one percent increase in the yuan will cause the cotton industry to lose 12 percent in sales, woolen textiles to lose 8 percent, and the entire clothing industry 13 percent.

China’s Economy is Fragile as Its Published Growth Rate is Not Accurate

The three driving forces of the Chinese economy are exports, foreign investment, and domestic consumption. Exports are facing difficulties, and China’s main export industries, textiles and clothing, had problems even before revaluation of the yuan, which is a further disadvantage for that industry. There has also been a decrease in foreign investment and the domestic consumer index has not been strong recently, especially in rural China.

Nor is the industrial structure in China booming, with the primary index having been down for a long time. The secondary industrial index has now cooled down and the tertiary industrial base has never been highly developed. In finance, China has too many bad debts. The government only admits to a portion of its bad debt total but foreign countries have estimated that China's loans have reached six trillion dollars, 45 percent of which are bad debts. When the Bank of China tried to enter the overseas market it did not do well.

Micro-economically, not one industry in China is booming and none of the industrial indices has met the standard. Though Beijing always says, "The situation looks good," all it can do now is deal with problems as they occur.

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