China has set itself a delicate balancing act with the decision, just ahead of the G-20 summit, to let its currency rise in value: Beijing must do enough to convince its trading partners it is playing fair, while at the same time minimizing any impact on its own economic growth.
For the time being, China appears to have defused growing international complaints – voiced with particular anger in the US Congress – that it keeps its exports artificially cheap and its imports unreasonably expensive by deliberately holding down the value of its currency, the renminbi (RMB), of which the yuan is the principal unit.
But the move last weekend to unpeg the RMB from the US dollar and let its value fluctuate a little was so cautiously framed that “it won’t make any big changes to the Chinese economy,” says Zhao Xijun, deputy dean of Renmin University’s School of Finance. And any hopes that the change might reverse the flow of jobs to China are “wildly overoptimistic,” adds Paul Cavey, of Australia’s Macquarie Bank.
The yuan closed this week with a .53 percent uptick, to 6.79 to the dollar, setting a new high against the US currency in the modern era. Few analysts expect the RMB to rise more than 3 percent this year, in a managed float that officials say will be gradual.
“The basis for large-scale appreciation of the RMB exchange rate does not exist,” the Central Bank said in announcing that market forces will be allowed to play a greater role in setting the RMB’s value.
Lots of contention in small revaluation
Even a small revaluation has proved highly contentious, with reports of fierce debates at the highest level of the government. Critics of the move fear it will render large swaths of low-cost, low-profit-margin Chinese industry uncompetitive by making its exports more expensive.
“If the exchange rate rises too much, many companies will go bankrupt,” warns Xiang Songzuo, an economist. “And when unemployment goes up, an economic problem will become a social problem.”
The Chinese government has made it a goal to move the nation’s manufacturing up the value chain, away from low-margin exports such as shoes, clothes, and toys. “But the government will have to be very careful to keep the balance,” Professor Zhao points out. “They want to change the structure of exports, but they don’t want exports to fall so much that growth is negatively affected.”
Low-end industries will have to move in years ahead
When the RMB was last allowed to float within limits, between 2005 and 2008, it gained almost 20 percent in value. Low-end manufacturers stayed open by boosting efficiency, says Arthur Kroeber, head of the Dragonomics consultancy. “But they’ve squeezed as much efficiency … as they can,” he adds. “This time a rising currency will start to make these guys less competitive. Over the next five years, low-end industries will be moving out of China.” Mr. Kroeber does not expect the RMB to gain enough value to cause “large-scale havoc” for exporters.
Some see the change in policy as a sign of self-confidence. “Generally speaking, it means that the government thinks the financial crisis is over for China” and that it can take risks again, says Zhao.
Most economists say Beijing acted only because the June 26 Group of 20 meeting had threatened to become a China-bashing free-for-all and because the White House had warned Chinese leaders it could not counter a move in Congress to sanction China for currency manipulation.
Certainly the policy carries risks. It will make exports more expensive, and thus harder to sell, at a time when China’s biggest foreign market, the European Union, faces grave economic difficulties.
China tries to head off speculation
And if investors expect the RMB to rise and rise, they will likely pour speculative “hot money” into RMB assets. That would undermine government efforts to deflate red-hot property prices, and threaten a stock market bubble.
The Chinese Central Bank has been seeking to dampen such expectation, moving the RMB’s official trading band down as well as up in daily fixes so as to create movement in the exchange rate, and stressing the modesty of its ambitions.
That will disappoint foreign critics, some of whom claim the RMB is undervalued by 25 to 40 percent.
Though that might have been the case some years ago, says Mr. Cavey, China’s trade surplus is now running at only half its 2008 rate and the government has been printing money to fund its stimulus package. “Under these circumstances it is hard to see why the RMB should be a very strong currency,” he points out.