Analysis: Yuan Revaluation Won't Revive U.S. Job Market

Tuesday, 06 Apr 2010 03:54 PM

 

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China's revaluation of the yuan could yield long-term benefits for both China and the world economy, but analysts say it won't restore vanished U.S. manufacturing jobs if past experience is any guide.

The Obama administration has said it would delay publication of an annual currency report, which U.S. lawmakers had demanded be used to name China as a currency manipulator.

Lawmakers argue Beijing deliberately holds down the value of its yuan currency to boost Chinese exports, unfairly harming U.S. companies and costing American jobs.

Critics of this stance point to evidence from 2005-08, which was the last time China let the yuan rise.

This experiment neither quickly aided U.S. exports, nor curbed massive Chinese trade surpluses, and probably limits the odds of a significant move over the currency from Beijing.

"Anyone looking for a revolutionary change in policy may be very disappointed," said Tim Adams, a former Treasury undersecretary for international affairs under Obama's predecessor George W. Bush.

Analysts say the Chinese experience with a rising yuan failed because it was not allowed to crawl higher at a fast enough pace. But they acknowledge plenty of Chinese think it shows foreign-exchange adjustments simply do not work.

"There is a raging debate between the technicians, the technocrats and the academics who are arguing for change, and those who want to maintain the status quo," said Adams.

U.S. Treasury Secretary Timothy Geithner, in explaining his decision to delay the release of the April 15 report, said he would continue to encourage China through the Group of 20 that developed and emerging economies should shift toward a more market-oriented exchange rate.

Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington, cautioned not to expect any yuan movement until Beijing saw clear evidence of sustainable economic recovery in Europe and the United States.

Lardy said there were compelling arguments for China to relax the yuan's peg against the dollar. But he saw no prospect that this would return employment to the United States that was lost years ago to cheap imports from foreign producers like China.

"That is a fallacy," he said. "Production is going to shift to the next lowest cost center, probably somewhere else in Asia. But that is not going to be the United States.

"Chinese appreciation would help from a global point of view by reducing imbalances, but should not be regarded as the principle solution to the U.S. current account deficit."

The current account is the broadest measure of U.S. external trade. It measures how much America must borrow from the rest of the world to fund its spending.

A large U.S. current account deficit and a massive Chinese surplus are seen as unsustainable in the long run. G20 leaders, including China, pledged in September to pursue policies that would lead to a better balance in world growth.

Analysts translate that as a commitment from Beijing to let the yuan rise at some point in the future, but offer no firm predictions on timing.

China has held the yuan near 6.83 against the dollar since July 2008, when desire for stability amid the global financial crisis prompted it to suspend a three-year experiment in which the yuan rose 21 percent versus the U.S. currency.

A weaker dollar makes U.S. exports cheaper, while raising the cost of imports for U.S. consumers. But the yuan move begun in 2005 had not translated into a significant improvement in the U.S. trade balance by the time Beijing restored the yuan/dollar peg.

The U.S. current account deficit grew in 2006 and remained high through most of 2008, before beginning to drop as a steep U.S. recession curbed American spending on imports.

That said, a more flexible yuan would provide the Chinese central bank with greater monetary policy flexibility.

Analysts believe this would be better for China in the long run, while greater domestic Chinese consumption would create massive export opportunities from which advanced countries like the United States could profit in the future.

"It is in U.S. interests to have stable and sustained growth in China. It is a very important market," said Uri Dadush at the Carnegie Endowment for International Peace in Washington.

But in the short term, a speedy rise in the value of the yuan could actually harm U.S. households by pushing up import prices, pinching American consumers still struggling amid unemployment of almost 10 percent.

"A yuan revaluation will raise prices for Chinese imports into the United States and the costs to U.S. households will be much bigger than any benefits to U.S. exporters," Dadush said.

U.S. exports to China last year were $69 billion, just 6.6 percent of total U.S. exports of $1.045 trillion.

A stronger yuan also means greater purchasing power for Chinese industry, potentially translating into higher demand for dollar-denominated commodities like oil, which could lead to another spike in gasoline prices for U.S. drivers.

However, analysts were not convinced there was a reliable connection between the yuan's value and oil prices.

"Global macro demand has more of an influence on commodity prices than the slow appreciation of the (yuan) would," said Adams. "A rising yuan could help accentuate a rise in commodity prices, but a strong economic rebound is a more important factor."

© 2014 Thomson/Reuters. All rights reserved.

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