We have formed the view that China should not significantly revalue its currency to serve the political whims of the moment. To date, the yuan’s peg to the dollar has served well both the industrialization and economic well-being of the people of China, as well as consumers in the United States. The US badly needs a more pro-active industrial policy, but fooling around with currencies is no replacement for this. We’ll start the round up with a couple of serious pieces and conclude on a humorous note: Steve Hanke and Michael Connelly in the WSJ:

• Does China manipulate its currency? It is not possible to give a categorical response to this question because “currency manipulation” is simply not an operational concept that can be used for economic analysis. The U.S. Treasury admitted as much in a March 2005 report that attempted to clarify the statutory meaning of currency manipulation for the Committees on Appropriations.

Is the yuan undervalued vis-à-vis the dollar? No. The nominal yuan/dollar rate has been set in stone at 8.28 since June 1995. Adjusting for inflation in China and the U.S., the real value of the yuan has depreciated by only 2.4% during the last decade. And today the yuan is in equilibrium in the sense that China’s inflation rate has converged to the U.S. rate. Not surprisingly, the IMF’s most recent Country Report on China concluded that “it is difficult to find persuasive evidence that the renminbi [yuan] is substantially undervalued.”

• Would a yuan revaluation reduce the U.S. trade deficit? Not much, if at all. After a yuan revaluation, the U.S. demand for foreign goods would simply be shifted from China to other countries.

• Would the House and Senate bills comport with international agreements and U.S. obligations? No. The yuan revaluation required by the Schumer-Graham bill would violate China’s rights and sovereignty. Under the IMF Articles of Agreement (Article IV, sec. 2(b)), a member country is free to choose its own currency regime, including a fixed exchange rate. The bill’s revaluation mandate would also throw a wrench into what has been an incredibly successful economic performance. Over the last decade, China avoided the great Asian financial maelstrom of 1997-98 and has realized stable prices and an annual growth rate of over 9%. The yuan’s fixed exchange rate against the dollar has provided the linchpin for that outstanding record.

According to Nobelist Robert Mundell, who is honorary president (along with Xu Jialu, vice chairman of the Standing Committee of the People’s Congress) of Beijing’s Mundell International University of Entrepreneurship, a substantial yuan revaluation would cut foreign direct investment, cut China’s growth rate, delay convertibility, increase bad loans, increase unemployment, cause deflation distress in rural areas, destabilize Southeast Asia, reward speculators, set in motion more revaluation pressures, weaken the external role of the yuan and undermine China’s compliance with World Trade Organization rules. In consequence, a forced revaluation would violate Article IV, sec. 1(i) of the IMF Articles of Agreement, which states that a member shall “endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability.”

The People’s Daily notes and quotes this article approvingly here, including these lines:

It says to require the RMB to appreciate will infringe on China’s sovereignty. According to the IMF agreement member states can freely choose their exchange rate system. It points out that now it is time for America to stop making hasty conclusion under false assumption. To oppose a country with the most population in the world and to do so by illegitimate means is not only unwise but also dangerous.

We initially thought the “dangerous” comment was a bit provocative, but indeed it comes from the original article. And there’s more from the People’s Daily, including an interview with Steve Roach, chief economist of Morgan Stanley:

Morgan Stanley Chief Economist Stephen Roach said that he was not surprised at the recent series of anti-China practices by US Senate. He revealed that as early as several weeks ago, some Washington politicians told him that this year will see the most strained US-China trading relations in the past 10 years. Roach who has always been concerned with China indicated that he “was worried” about the development of US-China economic ties.

In the opinion of Roach, the United States should not censure China on the issue of exchange rate, saying that it is a big mistake to regard China as a scapegoat of US trade deficit. He said diametrically contrary to the impression of Americans, the rapid increase of China’s exports is not boosted by China’s local companies, but is spurred mainly by the branches of transnational corporations in China as well as by Sino-foreign joint ventures. Roach worked out an account for the reporter. He said in the past 11 years, China’s export volume surged 650 percent, shooting up from US$91.7 billion in 1993 to US$593.4 billion in 2004. Among increased volume, 62 percent came from foreign-invested enterprises, these transnational enterprises came respectively from the United States, Europe, Japan and some other Asian countries. This figure shows that China’s strong export capability consists mainly of the energies of Western (including the United States) enterprises.

Roach said the main reason for the huge trade deficit and the current account deficit of the United States is that the savings level of the American nationals is too low. Statistics show that since the beginning of 2002, the net savings ratio (after deducting the factor of the devaluation of the US dollar) of the American nationals has dropped to a record low, accounting for only 1.5 percent of GDP. Due to insufficient domestic savings deposits, the US government cannot but attract foreign capital through huge current account deficit and trade deficit. If a country must have trade deficit, it is best for it to carry out trade with low labor cost countries. This is a most natural thing. China occupies the greatest share in US trade deficit, this actually is a good thing for the United States. It provides US consumers with an opportunity to buy cheap but excellent Chinese commodities.

In view of the above-mentioned reasons, Roach added, even if the RMB is revalued by 10 percent, it cannot fundamentally solve the problem related to US current account deficit and trade deficit. Although the politicians of Washington understand this logic, under the pressure of the voters, however, they cannot but pretend to be confused though they are clear-headed.

No doubt these last bits are interpolation by the newspaper, perhaps in the same way that it sort-of misquoted the managing editor of the Washington Post.

So the Chinese propaganda steam calliope, at least, is all against revaluation. This from AP, via WSJ:

China’s exports would contract sharply if the value of the Chinese yuan rose, a government report said, in the latest apparent signal that Beijing isn’t about to make any major changes in its currency policy. Export growth would slow to below 10%, down from more than 34% last year, even if the yuan appreciates by only 3% to 5%, said the report by Zhai Zhihong, a senior official at the National Bureau of Statistics. If the yuan’s value were allowed to rise by up to 15%, as some have speculated, China’s exports could “contract by a rather large amount,” Mr. Zhai wrote in the report, viewed on the bureau’s Web site Wednesday.

The above commentary, from all parties, seems pretty reasonable to us, though we recognize and appreciate some of the opinions from the revaluation camp as well. But someone ought to tell the People’s Daily to upgrade their editors. They do themselves no favors with interviews like this, following hard upon Steve Roach’s:

Famous US economist Lyndon La-Rouche: Calling for the establishment of a new Bretton Woods system

The famous US economist repeatedly and successfully foretold financial crises in various parts of the world, including Brazilian, Russian and Asian financial crises. In a recent telephone interview with the correspondent, this economist said bluntly: US Senate lost its reason in doing so! He said it should not impute the problem emerged in the US economy to the exchange rate of RMB. The Senate’s unilateral antagonist conduct with the odor of imperialism is simply unhelpful to a solution of the problem.

He also said in the tone of a prophet: It is necessary to perform a major surgery to solve the problems emerged in the US economy. In his opinion, the financial and monetary systems of the world today has been rotten to an incurable state….

Note to People’s Daily: when your interviewees start speaking “in the tone of a prophet,” it might be time to turn off the tape recorder and move on.

This entry was posted on Wednesday, May 11th, 2005 at 7:29 am and is filed under China, General, business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.