From Overseas Press

Stronger yuan no gift for US firms

(chinadaily.com.cn)
Updated: 2010-04-22 17:19

Economists have gradually reached a consensus that the yuan's appreciation would neither rescue the American manufacturing sector nor destroy the Chinese one, said an article published in the Wall Street Journal on April 19.

According to the article, in theory, a stronger Chinese currency would make Chinese exports less attractive to American buyers, and make US exports more competitive, but "how it plays out in practice could be less straightforward."

First, China is almost certain to take a gradual approach, though critics in the US argue that the yuan is as much as 40 percent undervalued against the dollar, said the article. "The most probable scenario is that the yuan fluctuates more in both directions against the dollar, with authorities allowing modest appreciation."

Second, although a stronger currency would certainly affect Chinese exporters, the currency isn't the only factor behind their success. The article quoted the economists as saying, "The structure of China's domestic economy matters a lot: Low interest rates and cheap energy and land all play a role in building up Chinese surpluses."

Meanwhile, the imported components and materials would cost less in yuan terms. As "processing trade" makes up almost half of all China's exports, "Chinese exporters will be less affected by a stronger currency than those in a country that relied more on domestic materials," said the article, "which is the main reason why J.P. Morgan economists estimate that a 10 percent trade-weighted appreciation in the yuan would reduce China's overall exports by only two percent."

Third, US manufacturers would not be likely to reap the benefits from the losses by Chinese exporters. "A decrease in US imports in China could well be offset by an increase in US imports from competitors like India, Vietnam, Mexico or Indonesia," said Shang-Jin Wei, an economist at Columbia Business School.

Last, the article pointed out that a stronger yuan might bring other advantages to China's domestic economy: It would help combat inflation and raise the global purchasing power of Chinese consumers, while keeping the interest rates more independent of the US.