Yuan-a Revalue?
Tied Yuan
I have hesitated to comment on whether or not China should revalue the yuan. Not because I’m shy, but because everybody else is jumping on this one.
We see American politicians ranting and raving, certain that China is deliberately hurting the world through exchange rate policy. These are generally the same know-nothings that are convinced that China will sell all its American bonds as an act of economic war – like they expect that Beijing will enjoy selling at a huge loss. How dumb do they think the Chinese are?
The other extreme, of course, is the Chinese stonewall reaction, closing the gates and refusing to consider any possibility of revaluation. They have done this so much on so many issues that Beijing has now trained a large cadre of international reporters to say that change will only come if we stop criticizing. Hunh? It’s a brilliant negotiating position for China, but it should be ignored by the rest of the of the world. It seems that any criticism of China, no matter the subject, earns condemnation as an infringement of Chinese sovereignty. But, since any compromise with another country on anything is a limitation on sovereignty, this amounts to a Chinese declaration that it will not negotiate with anyone and plans to hunker down in the Forbidden City and dictate to the world. I’m not convinced that China really wants a return to the days of the Middle Kingdom, but perhaps I am too hopeful. At best, the sovereignty plea is rather immature.
It is in China’s interest to revalue the yuan – slowly. Revaluation will be key to controlling China’s inflation which bids to become a major destabilizing influence in the country. Revaluation is an easy way to reduce prices by making imports less expensive and forcing domestic producers to compete with those imports. China, however, needs to accomplish this slowly. A Chinese official said last week that many Chinese exporters are operating on a profit margin of only 2%, which means these firms are highly vulnerable to a sharp revaluation. It also means that China’s export machine is not the juggernaut the world believes it is, that China may do better without those marginal exporters, and that China would be wise to move some of its resources out of exports and into domestic ventures through increasing domestic consumption. Which brings us back to revaluing the yuan to control domestic inflation.
One might also argue that, by tying the yuan to the U.S. dollar, China has actually given away its sovereignty for the sake of marginal exports and limited its own ability to control its economy. Any country tying their currency to the U.S. dollar has surrendered exchange rate policy and much of their ability to control prices to the U.S. Federal Reserve. Does Beijing really want the key decisions about Chinese inflation to be made by Ben Bernanke? I didn’t think so.
So, revaluation is in China’s own interest. But sudden change brings unanticipated consequences. So best to do it in predictable stages, slowly, and to protect Chinese sovereignty by re-establishing Beijing’s authority over its own currency.
