Glass half-full or half-empty, the yuan will still strengthen
Tom Holland 09 March 2010
There are two ways of reading Saturday’s comments from People’s Bank of China boss Zhou Xiaochuan about Beijing’s exchange rate policy.
If you are a glass half-full sort of person, you are probably concentrating on Zhou’s hint that Beijing may resume allowing the yuan to appreciate against the US dollar.
In his remarks, Zhou called the policy China adopted in mid-2008 of holding the yuan rock-steady against the US dollar “part of the package of policies to deal with the global financial crisis”.
“The problem of how to exit from these policies arises sooner or later,” he added, sparking intense speculation that Beijing may be preparing a revaluation.
On the other hand, if you are a glass half-empty type, you are probably focusing on how Zhou played down the chances of any immediate change of policy, saying “we must be extremely prudent about our choice of timing”.
In addition, you would probably point to how Commerce Minister Chen Deming has consistently opposed any notion of yuan appreciation, lest a stronger currency hurt China’s export sector. On Saturday, he repeated his concerns, saying that China’s exports may take two to three years to recover to pre-crisis levels.
(Quite what he meant by this is hard to fathom. In January, China’s exports were worth US$109.5 billion, up a hefty 26 per cent compared with January 2007, before the outbreak of the credit crunch.)
As a result, people on both sides of the argument found plenty to support their views: both those who believe mounting economic and diplomatic pressures will force an early return to yuan appreciation, as well as those who believe China has little to gain in the near term and much to lose from a stronger currency.
It is true that the recent appreciation of the US dollar in the foreign exchange markets has relieved some of the short-term pressure on Beijing to revalue. Because of its peg to the US dollar, the yuan has climbed against a broad basket of currencies over the last few months. Since the beginning of December, it has risen more than 10 per cent against the euro, muting protests from Brussels and Frankfurt about the Chinese currency’s undervaluation.
But in the longer run, few doubt that the Chinese currency will have to strengthen. There is a strong argument to be made that yuan appreciation is not only desirable but that it will be an essential element of the rebalancing of China’s economy away from exports and towards domestic consumer demand that Beijing aims to achieve.
“An undervalued currency acts as a tax on consumers and a subsidy to producers,” says independent economist John Llewellyn, author of a major new research report for Japanese securities house Nomura entitled The Ascent of Asia.
According to Llewellyn, China has now completed what amounts to the easy phase of its economic development, making the most of low wages to build an export industry that can out-compete manufacturers from developed markets.
But, he says, the low-cost manufacturing for export model cannot power growth indefinitely.
“Beijing would be unwise to plan on exports growing as fast in the future as in the past,” he warns, arguing that as Chinese industry moves up the value chain, protectionist calls will mount in the world’s developed economies, just as they did against Japan in the 1980s.
The challenge for China now will be to engineer a rebalancing of its domestic economy while maintaining growth rates - something Japan signally failed to achieve.
Part of the answer will lie in encouraging a new environment of energetic competition in the domestic market, rather than favouring state-owned companies at the expense of the private sector.
In turn, that will require extensive liberalisation of the financial system to ensure that markets can allocate capital to enterprises more efficiently. And that will mean appreciating the yuan to remove the distortions created by an undervalued currency.
None of this will be easy, warns Llewellyn, a former chief of staff at the Organisation for Economic Co-operation and Development. Although rebalancing will create winners, it will produce losers, too, something Beijing has so far been reluctant to accept.
Ultimately, however, rebalancing is essential if China’s economic development is to continue, which means it doesn’t matter whether your glass is half-full or half-empty, the yuan will still have to strengthen over the longer term.
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Glass half-full or half-empty, the yuan will still strengthen
Tom Holland
09 March 2010
There are two ways of reading Saturday’s comments from People’s Bank of China boss Zhou Xiaochuan about Beijing’s exchange rate policy.
If you are a glass half-full sort of person, you are probably concentrating on Zhou’s hint that Beijing may resume allowing the yuan to appreciate against the US dollar.
In his remarks, Zhou called the policy China adopted in mid-2008 of holding the yuan rock-steady against the US dollar “part of the package of policies to deal with the global financial crisis”.
“The problem of how to exit from these policies arises sooner or later,” he added, sparking intense speculation that Beijing may be preparing a revaluation.
On the other hand, if you are a glass half-empty type, you are probably focusing on how Zhou played down the chances of any immediate change of policy, saying “we must be extremely prudent about our choice of timing”.
In addition, you would probably point to how Commerce Minister Chen Deming has consistently opposed any notion of yuan appreciation, lest a stronger currency hurt China’s export sector. On Saturday, he repeated his concerns, saying that China’s exports may take two to three years to recover to pre-crisis levels.
(Quite what he meant by this is hard to fathom. In January, China’s exports were worth US$109.5 billion, up a hefty 26 per cent compared with January 2007, before the outbreak of the credit crunch.)
As a result, people on both sides of the argument found plenty to support their views: both those who believe mounting economic and diplomatic pressures will force an early return to yuan appreciation, as well as those who believe China has little to gain in the near term and much to lose from a stronger currency.
It is true that the recent appreciation of the US dollar in the foreign exchange markets has relieved some of the short-term pressure on Beijing to revalue. Because of its peg to the US dollar, the yuan has climbed against a broad basket of currencies over the last few months. Since the beginning of December, it has risen more than 10 per cent against the euro, muting protests from Brussels and Frankfurt about the Chinese currency’s undervaluation.
But in the longer run, few doubt that the Chinese currency will have to strengthen. There is a strong argument to be made that yuan appreciation is not only desirable but that it will be an essential element of the rebalancing of China’s economy away from exports and towards domestic consumer demand that Beijing aims to achieve.
“An undervalued currency acts as a tax on consumers and a subsidy to producers,” says independent economist John Llewellyn, author of a major new research report for Japanese securities house Nomura entitled The Ascent of Asia.
According to Llewellyn, China has now completed what amounts to the easy phase of its economic development, making the most of low wages to build an export industry that can out-compete manufacturers from developed markets.
But, he says, the low-cost manufacturing for export model cannot power growth indefinitely.
“Beijing would be unwise to plan on exports growing as fast in the future as in the past,” he warns, arguing that as Chinese industry moves up the value chain, protectionist calls will mount in the world’s developed economies, just as they did against Japan in the 1980s.
The challenge for China now will be to engineer a rebalancing of its domestic economy while maintaining growth rates - something Japan signally failed to achieve.
Part of the answer will lie in encouraging a new environment of energetic competition in the domestic market, rather than favouring state-owned companies at the expense of the private sector.
In turn, that will require extensive liberalisation of the financial system to ensure that markets can allocate capital to enterprises more efficiently. And that will mean appreciating the yuan to remove the distortions created by an undervalued currency.
None of this will be easy, warns Llewellyn, a former chief of staff at the Organisation for Economic Co-operation and Development. Although rebalancing will create winners, it will produce losers, too, something Beijing has so far been reluctant to accept.
Ultimately, however, rebalancing is essential if China’s economic development is to continue, which means it doesn’t matter whether your glass is half-full or half-empty, the yuan will still have to strengthen over the longer term.
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