Op-Ed Contributors

Yuan and absurdity of US demand

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

US hawks, however, have always targeted China and pressured it to dance to the tune of their demand. Even if China has pledged to make the yuan more flexible by reforming its exchange rate mechanism further and peg it to a basket of currencies to better reflect the demand of the market, some US politicians and industrial leaders say it's "too little too late" and demand the Chinese currency be revaluated by up to 40 percent.

Forcing the value of the yuan to rise would cause further uncertainties in the world economy, which today faces other big challenges such as the European Union debt crisis. "We are not (living) in a normal stable economic environment; we are just about recovering from a very bad financial crisis and what happens in the next six to 18 months is very important and would have a very big effect," he says. "The last thing the world needs at present is a short-term increase in China's trade surplus because of an increase in the value of the yuan."

As the yuan's value rises, the US would demand more revaluations, thus making it unaffordable for the Chinese and world economies. "The point is that the US has not given it a really serious thought."

Ross says economic history shows that the only way for the US to increase exports and jobs is to raise its level of investment. The Americans are famous for their low savings rate while China, Japan and some other countries boast high savings that can be used for investment.

The US suffered job losses because of the global financial crisis and because the savings rate in America was (and still is) very low. "It's very easy to explain the financial crisis in the US: The investment level of the US has not gone up in the past 150 years," he says. "The only way the US could increase its growth rate, which can create more jobs, is to raise the level of investment in its domestic market."

Ross accuses the US of trying to slow down growth of other countries by pressing them to raise the exchange of their currencies and lower their rate of investment. "The two effective means of slowing down an economy are to increase the exchange rate of its currencies sharply and force it to reduce its level of investment," Ross says. "This is what the US did for Japan in the 1970s and in later decades."

"What are the two demands the US places on China? One is to raise the exchange rate of the yuan. The second is to increase the share of consumption," he says. "But the increase in the share of consumption means reducing the share of investment and if China does these two things simultaneously, then its economy would slow down a lot."

Will that benefit China or, more importantly, the world economy?

(China Daily 07/29/2010 page9)