Pressing China on the yuan won't work

Updated: 2010-03-19 16:04
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Under the great pressures of the rate of unemployment and the upcoming mid-term elections, U.S. politicians pressed China much more on the yuan appreciation. After 130 U.S. Congressmen demanded that the Obama administration label China a "currency manipulator", some U.S. senators proposed legislation on Tuesday imposing stiff penalties against China if it refuses to revalue its currency, which only adds fuel to the originally hot issue of the Chinese currency between the U.S. and China in recent days.

Time magazine journalist Michael Schuman published a blog on its website on Wednesday, pointing out that under such circumstances the yuan has become "politicized" and China has been made "an easy target for Americans" for their own economic woes. But he believed that "such efforts simply won't work, and may actually hurt, not help, the U.S. economy." He listed the following three reasons.

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First, China will never yield to such pressure and reform their currency system. "The Chinese are highly sensitive to criticism and pressure on this front," he said, "and threats from the U.S. Senate only corners Beijing into a position where it becomes politically difficult for the government to take any action." And "if China reformed its currency regime under such circumstances," he continued, "it would appear as an embarrassing sign of weakness both at home and abroad."

Second, a stronger yuan cannot solve the American economic problems. On one hand, he deemed it could be "wishful thinking" that a stronger yuan would make U.S. industry more competitive and the giant trade deficit evaporate. "When the yuan was appreciating against the U.S. dollar, from 2005 to 2008, the U.S. trade deficit with China actually increased," the article said. He also suggested that there are many other options to reduce the U.S. trade deficit, including "raising the U.S. saving rate and bringing down the level of consumption".

On the other hand, a stronger yuan might be harmful to the U.S. economy in certain key ways, he said. All the Chinese goods will become more expensive, which American consumers cannot afford.

Third, other developing countries would benefit from a more expensive yuan while the U.S. probably would get nothing. "Even if the yuan strengthens and certain exports from China become less competitive", he said, "jobs will not necessarily flow back to the U.S. in certain basic industries". Instead developing countries with cheap labor will become the exporters' favorite destination.