From The Chinese Press

Updated: 2011-08-25 07:39

(China Daily)

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Dilemma of yuan revaluation

In the shadow of the United States' sovereign debt crisis, US Vice-President Joe Biden's visit to China was meant to focus on US treasury securities as well as the Chinese currency's exchange rate. It is thus necessary for China to change its attitude toward the United States' economic problems, because if the US Federal Reserve launches the third round of quantitative easing (QE3), the dollar will inevitably fall and cause devaluation of trillions of dollars of the US debt that China holds, apart from giving rise to runaway inflation across the world. The resultant effect would push China's macroeconomic policy environment toward a dilemma, says an article in Shanghai Business. Excerpts:

Since the outbreak of the US debt crisis, Beijing has been urging Washington to shoulder its responsibilities and ensure it does not spill over to the rest of the world. But at the same time, China has shown relatively enough confidence in US Treasuries.

The United States is still the largest and strongest economy in the world, and by far the most dynamic. More importantly, China's current economic development pattern prompts it to hold abundant foreign exchange reserves - and the reserves are expected to increase further because the growth pattern is unlikely to change in the short term.

To ensure that its foreign exchange reserves expand as well as increase in value, China has to depend, at least partly, on overseas investments. And US Treasuries are still the best bet for that. That's why China bought $5.7 billion of US debt in June, and thus increased its holding rapidly within three months.

Therefore, it was not difficult for Biden to "persuade" China to retain its confidence in US Treasuries and continue purchasing them.

The yuan has increased in value by about 30 percent since it was depegged from the dollar in 2005. It is the result of China's continuous trade surplus, and shows that it has taken steps to tackle the severe inflation in its domestic market.

Consequently, it is the result of the understanding between China and the US on the yuan's revaluation, even though Washington is not happy with the pace of its yuan's revaluation.

Since "made-in-China" products make up only 1.9 percent of an average family's consumption in the US, Americans cannot assume that a faster revaluation of the yuan would create more space for US manufacturers in their domestic market.

In fact, even the about 30 percent revaluation of the yuan in six years, which is high by any standard, has had a rather limited positive impact on US manufacturers' competitiveness.

What's more, a faster pace of the yuan's revaluation will harm small-and medium-sized enterprises in China, which are the country's main exporters. Worse, since changes are unlikely to occur in the existing economic structure of China any time soon, a faster revaluation of the yuan will deal a serious blow to the national economy.

The global financial crisis may not have had as shocking an impact on China's economy as it had on the developed countries'. But that does not mean China can take the blow dealt by the yuan's faster revaluation without suffering an economic shock. Given the increase in labor cost, rising environmental cost and the unreasonable institutional cost, the yuan's value should actually be decreased.

China is not worried that Standard & Poor's has downgraded the US credit rating from AAA to AA+. Rather it is concerned about the Fed announcing QE3.

If the US administration chooses to make the irresponsible choice of devaluating the dollar further, China would not only stop buying US debt, but also gradually decrease its holdings, which would certainly not be in the interests of the US or in accordance with Biden's wishes.

(China Daily 08/25/2011 page9)