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China's yuan on long gaining streak

11:29, September 17, 2010

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By Li Hong

China's monetary authorities have kept its currency, the yuan, much stronger these days in an effort to blunt US Congress members bristling at the currency's "softness". As many powerful Capitol positions are on the line as the November mid-term elections draw nearer, Democrats and Republicans are once again picking up one of the oldest irritants in Sino-American relations, pointing to the exchange rate and firing political salvos on China.

The yuan is traded around the official central-parity rate of 6.7172 against the greenback today, its highest level in more than 15 years. Since July 1, 2005 when Beijing initiated reforming its currency valuation system – ending a peg to the dollar and making it fluctuating to the curve of a basket of global currencies, the yuan has gained about 23 percent in value against the U.S. dollar, the No 1 reserve currency till today.

As a matter of fact, the People's Bank of China, the central bank, has been receptive to the calls for the yuan to be kept flexible, and at the same time, helping the economies of China and the world progress firmly. During the two years from July 2008 to June 2010 when the Wall Street-generated global financial crisis tumult the market, the bank made the value of the yuan pegged to the dollar, as it exactly did in 1997-98 when the Asian Financial Meltdown churned the region. The purpose of the two pegs is well known to all: to prevent contagious chain effects from happening and worsening the woes already there, and to stabilize the economy of China's, Asia's and, this time, the world's, at an earlier time.

Now, both politicians and star investors are saying the same thing that China, recovering much faster from the crisis than others, has acted as the motor of the global economy. If China were in the toes of Russia, whose economy contracted nearly 10 percent in 2009, or the same as the chilly United States last year, this recession could have been cascading till today and deteriorated to one dwarfing the 1929-32 Great Depression.

Public opinions expressed on the Internet are manifestations of ordinary people's feelings and anxieties. Although economic heavyweights, including The New York Times columnist Paul Krugman, have maintained their strong dissatisfaction with China's currency policy, many of the plain-clothes bread-earners and aging pensioners commentate online that the low-priced Chinese goods have made their lives easier, especially at a time of this prohibitive hardship.

Then, the economic pundits and China critics would go on to reprimand China for "intentionally" keeping a lower value of the yuan in order to gain an upper-hand in exports to America, which, these people say, has bankrupted American manufacturers and made Americans jobless. But, will the insolvent factories come back humming and employing, once the value of the yuan is hiked by another 23 percent? Nobel laureate Krugman knows that slightly higher-priced products, made in Mexico, or Vietnam, will replace inexpensive goods made in China on the shelves, and the bread-earners and pensioners will have to pay more. It is fairly unlikely that the multinational companies would retool their plants and contributing jobs in the United States.

And, if the retail price rises all of a sudden in America, economists know it will add to inflation, and complicates the Federal Reserve's consistent efforts to maintain low rates to prop up an anemic recovery. US medium- and small-size businesses would be put on fire-stove if their financing cost jumps.

That said, I still believe that China, once finding itself on a firmer ground after its economy is cushioned by the unprecedented $588 billion stimulus spending, should quicken the pace of currency appreciation against all global currencies including the dollar. Now, the gaining streak of the yuan in the past few days is a move in the right direction, and will be a positive to both China's and the world's economy.

Official trade statistics have shown China's imports expanded at a much faster pace than exports in July and August, reflecting rising Chinese customers' appetite for German cars, Japanese technology, Australian mines, Brazilian minerals and Russian oil. China's role in propelling a world economy is going to become more of a calming fact, just taking into a look of the extension of high-speed railroads, spruce-ups of residential buildings and pack-ups of vehicles on the streets of more than 800 cities.

To help Chinese consume more American products, the government in Washington needs to relax its Cold-War-perplexing controls on civilian as well as military technologies, because exports of California grapes, Florida oranges and Midwest wheat and beans cannot make a balanced sheet. And, it is important to allow Chinese businessmen to invest in American ventures and buy stakes in local projects, providing permanent jobs to American people and contributing to local government revenues.

Looking to the foreseeable future, the monetary authorities in Beijing should work out a roadmap -- or they have already done – to adopt a market-regulated currency rate policy, which will make the yuan a global reserve currency the same as the U.S. dollar, the euro and the yen. By that time, this country will, perhaps, cease to be the world's "sweat-shop" making countless goods so inexpensive to have benefited tens of billions of families worldwide. Till then, I anticipate a continuous process of strengthening China's currency.

The articles in this column represent the author's views only. They do not represent opinions of People's Daily or People's Daily Online.

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About this column

Li Hong has been a reporter and column writer, mainly on China's economy and politics.

He was graduated from Beijing Foreign Studies University, and once studied in University of Hawaii and the Poynter Institute in Florida.

Columnists

John 
Milligan-Whyte 
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Dai Min

John Milligan-Whyte and Dai Min, the executive producers and co-hosts of the Collaboration of Civilizations television series adapted by the eight books they wrote in the America-China Partnership Book Series published in English and Mandarin in 2009-2010 that created the "New School of America-China Relations." They founded the America-China Partnership Foundation and Forum in 2008 and the Center for American-China Partnership in 2005, which was recognized in 2009 as "the first American think tank to combine and integrate American and Chinese perspectives providing a complete answer for America and China's success in the 21st century."

Li HongmeiLi Hongmei

Li Hongmei, editor and columnist of PD Online.

http://english.people.com.cn/90002/96743/7143369.pdf