Op-Ed Contributors

Yuan and absurdity of US demand

By Xin Zhiming (China Daily)
Updated: 2010-07-29 07:50

The conventional wisdom is that once the value of the yuan is increased, the US trade deficit with China would start falling. This rationale has prompted many Americans to push for further, faster revaluation of the yuan even after China changed its currency policy.

For those who endorse such logic, the yuan's value is a paramount factor behind China's - and their countries' - trade balances. But for John Ross, former deputy mayor of London in charge of economic and business policy, the trade gap between a country and China would widen instead of narrowing down, at least in the short term, if the yuan's values go up.

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Ross, a visiting professor at Antai College of Economics and Management in Shanghai Jiaotong University, says that once the yuan's value rises the Americans would demand further revaluation, ultimately forcing the yuan to rise to a level that would not only disrupt China's trade and economy, but also pose a threat to the entire world economy.

Moreover, the number of jobs in the US would not increase unless the federal government changes its economic policy and raises investments, which is the real solution to its problem. Pressuring China to raise the yuan's value sharply will not help.

"Most people, particularly those abroad, don't know the real situation. The reason they want the yuan to be revaluated further is because they think it would reduce China's trade surplus. But let's say up to 18 months, this is not true."

From what happened between 2005 and 2008, when the yuan rose 21 percent against the dollar, it's clear that China's "trade surplus rose, too", Ross says. Any revaluation of the yuan raises the price of exports and reduces the price of imports, which means China's trade surplus would get bigger as its currency rises.

By examining historical data, Ross has found that China's exports and imports grew simultaneously after 2005 in terms of volume, but the prices of exports rose more relative to import thanks to the revaluation of the yuan. "That's why its trade surplus with the US is bigger today."

There's a big debate among economists over what would happen in the long term if the yuan rose further, he says. Some people think China's trade surplus would increase, while others think it would fall in the long run. "But there's no difference (in what they say) would happen in the short term."

Seen from the history of US trade, its overall trade deficit rose at nearly $70 billion a month until 2006, he says. Then it stabilized before rising again after the passage of the worst period of the global financial crisis. "That's why (American) people are getting agitated because it has worsened But it is not rising because of China, for - I'm using US figures, not Chinese figures - the trade surplus of China with the US is rather stable, slightly under $20 billion a month."

In other words, claiming that the trade deficit of the US is rising because of China is simply not true, he says. "It's because its (America's) trade deficit with the rest of the world is rising, too."

The US has a trade deficit with about 90 countries. "If you reduce its trade deficit with China, all that would happen is that its trade deficit with some other country would increase."