Forcing China to revalue currency may boomerang

Updated: 2010-03-18 15:12
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Editor's Note: In its 17 March analysis article, AFP quoted three US experts' opinions to conclude that the appreciation of China's currency will not benefit, or may even harm US economy.

The US may be barking up the wrong tree by trying to force China to revalue its currency as it could fuel a rise in prices of favorite American products such as the iPhone and even plunge the Asian giant into social unrest, some analysts warned Wednesday.

The debate over charges that Beijing was securing an unfair edge in trade by keeping its yuan currency artificially low flared anew when US senators introduced legislation Tuesday that would impose tough new penalties on China if it failed to revalue its currency.

A key factor behind the US prodding China to appreciate its currency is the ballooning US trade deficit with China -- jumping from 84 billion dollars in 2000 to nearly 227 billion dollars in 2009.

But studies have shown that when the yuan rose nearly 20 percent against the greenback from 2005, when Beijing made its currency more flexible, up to 2008, the deficit actually increased sizably.

"The size of the rolling 12-month American deficit with China increased by about 50 percent" over the period, said Derek Scissors, a China expert at the Heritage Foundation.

"It shows that a notable appreciation of the exchange rate is consistent with an increase in deficit rather than decrease in the deficit," he said.

Several US lawmakers and economists believe the yuan is undervalued by up to about 40 percent, providing Chinese companies an unfair price advantage in trade.

Any rapid yuan appreciation would push up the cost of Chinese exports, hurting American consumers via higher prices of household and other goods produced in China, some analsyts argued.

US companies with operations in China will also be hurt by a stronger yuan as they sell back their goods to America or overseas.

The US Senate legislation threat in particular was based on the assumption that if the yuan were more expensive relative to the dollar, American domestic production would rise and the US trade imbalance will fall.

"But neither assumption is correct," said Frank Newman, a former deputy secretary of the US Treasury and now chairman and chief executive of Shenzhen Development Bank, a Chinese commercial bank.

Making Chinese products more expensive in the United States will do nothing to shift production to US factories, he said in a commentary in the magazine Foreign Policy. It may instead nudge production to other developing countries.

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