Currency illusions dazzle US politicians
- Source: Global Times
- [21:35 July 29 2010]
- Comments
By Sun Lijian
US senators often reprove China for severely undervaluing the yuan, which they claim would boost Chinese exports.
However, the exchange rate issue is quite a tricky one, and many outspoken Americans don't really understand it.
The appreciation of the yuan could make imported products cheaper and help ordinary Chinese buy more foreign goods.
However, Chinese consumers' average income is much lower than that of consumers in developed countries. Incomplete social security and welfare systems have also led to a high volume of savings.
In addition, the immature consumption environment and services in China do not adequately stimulate consumption by the wealthy class.
Therefore, the effect of yuan appreciation on trade would be quite limited.
In contrast, gradual economic recovery in the US and European countries will further enhance Chinese exports. Essentially, it is not the yuan exchange rate, but the weakened purchasing power due to the economic recession in the US and Europe, that affects China's external trade surplus.
Some US senators also believe that reforms in the yuan exchange rate will exert much more positive effects on China's own economy than its trade partners. In particular, they believe it can raise Chinese purchasing power.
Undoubtedly, in a short term, the Chinese will evidently have more enthusiasm for traveling and consuming abroad.
However, once the "currency illusion" brought by the effect of yuan appreciation disappears, ordinary Chinese may feel the loss of competitiveness of Chinese enterprises and thus the decrease of their wages. Unemployment could then become a severe problem.
Moreover, sudden and strong appreciation of the yuan would cause empty domestic industries and bubbles in financial market.
China is still a developing country where the average income per capita is slightly over $3,000, and people still rely on diligence and thrift to accumulate wealth.
China also has the advantage of a relatively cheap labor surplus, which contributes to the trade surplus.
However, there are other reasons for the Sino-US trade imbalance, such as international labor divisions, industrial transfer, US trade policies toward China and restrictions on its exports. Free trade, rather than yuan appreciation, is the fundamental solution to promote trade balance.
China has started to gradually revalue the yuan. It embraces gradualism in exchange rate reform, just like it did in the highly successful macroeconomic reforms of the past 30 years.
Some stubborn US senators require China to launch a larger-scale exchange rate reform. It's like looking only at the speed of a car and ignoring its purpose and the conditions of the road.
Such behavior harms the interests of not only the Chinese, but also Americans who conduct free trade with China and consumers in other developed countries.
