China’s weekend announcement that it will permit more flexibility in the exchange rate of its currency sounds like news that might interest Wall Street more than Main Street. But the fact is that such a move – it if really happens – could affect the pocketbook of virtually every consumer in the US.
Why? Because a big jump in the value of Chinese currency, the renminbi, could make products manufactured in China more expensive. And “products manufactured in China” means pretty much the entire inventory of every big-box store in America, as anybody who’s pulled out a credit card in the last decade or so knows.
Since even members of Congress shop at Wal-Mart, you might think Washington would be angry at the possibility of a stronger renminbi (China’s currency is also known as the “yuan”.) But that’s not true, as the US government has long pushed China to take such a revaluation step.
While a stronger renminbi makes Chinese products more expensive here, it also makes US products relatively cheaper there, and in general allows US exporters to better compete with Chinese competitors all around the world.
The US, Germany, Japan, and other economic powers have long accused China of keeping the price of its currency artificially low, to make sure its weed whackers, air conditioners, cordless drills, and other consumer products are the cheapest around. This likely will still be a big topic at the G-20 global economic summit coming up next weekend in Toronto. But the talk will be less contentious than it might otherwise have been.
“The [currency] move will help China deflect criticisms on its currency policy at the G-20 meeting, and reduce tensions between China and its major trading partners,” reads an analysis from IHS Global Insight.
Currency value is as much a part of the price of a product made in another country as is the price of raw materials like plastic and cardboard. And Beijing historically has intervened in global markets to make sure the renminbi remains cheap compared with the dollar, the euro, and the yen.
That is one reason Chinese manufacturing has grown so fast in recent decades that at the moment, in dollar terms, it has drawn equal in value to manufacturing in the US.
A cheap renminbi provides world consumers cheap imports, which they like. But it also takes away millions of domestic manufacturing jobs, which they don’t like. And it affects China’s consumers as well, by making imports in China more expensive, and feeding Chinese inflation.
That’s why a floating renminbi should constitute a “rebalancing” of the world economy that would be good for everyone, say many US economists.
Indeed, China’s announcement that it would allow the renminbi to float had an immediate effect on financial markets Monday: The currency strengthened to its highest level in nearly two years.
The real question now, according to some critics of China in the US, is whether Beijing’s move is cosmetic, and simply intended to placate the world in advance of the coming G-20 meetings.