Viewpoint: Common Currency

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Show me the money The world's spotlight is on the yuan

Once again the U.S. and China find themselves in a spat over the Chinese currency, the yuan. Many politicians and economists in the U.S. believe that Beijing manipulates the yuan's value to keep it artificially cheap to give Chinese exports an unfair price advantage in international markets, thus holding back America's economic recovery. In a sign of growing frustration in Washington, a bill in the House of Representatives would direct the U.S. government to slap punitive duties on goods from countries that keep their currencies undervalued. The bill is clearly targeted at China. One of its authors, Congressman Tim Ryan, recently warned that the U.S. "cannot continue to look the other way as China's currency policies slowly but steadily smother what remains of our American manufacturing." An adviser to China's central bank shot back that Beijing "will not appreciate the yuan solely because of external pressure."

Beijing ended a two-year de facto peg between the yuan and the dollar in June. Since then, the yuan has appreciated less than 2% against the dollar, with much of that change suspiciously coming in the days surrounding congressional testimony by U.S. Treasury Secretary Timothy Geithner on China's yuan policy. Geithner said China intervenes in currency markets "on a very substantial scale to limit the upward pressure of market forces" on the yuan. How much the yuan is undervalued is a matter of speculation and debate. But clearly it is undervalued. We know this because it tends to get stronger when Beijing does allow its value to change.

Nevertheless, a stronger yuan is no cure-all for America's economic ills. Sure, if Beijing allowed the yuan to appreciate, China's giant trade surplus with the U.S. the main target of Washington's ire could shrink. Imports would become cheaper for Chinese consumers and companies, stimulating American exports to China and creating badly needed jobs in the U.S. But a stronger yuan would not automatically balance trade between the U.S. and China. Between 2005 and 2008, when the yuan appreciated about 21% against the dollar, America's trade deficit with China increased. China simply produces too many of the basic consumer goods Americans need to buy, from toys to PCs. That's why fixing the imbalances between the two countries will take much more than currency movements. It requires major structural reforms in both economies. Americans have to save more and spend less; Chinese have to spend more and save less.

A more expensive yuan can hurt Americans as well. It means heftier price tags on Chinese-made goods on Walmart shelves, taxing American consumers already stretched by unemployment and debt. Nor would a stronger yuan encourage factories and jobs to return to the U.S. from across the Pacific. Yes, yuan appreciation would make many export factories in China less competitive. But those factories would more likely relocate to the many other developing nations India, Indonesia and so on where costs are significantly lower than America's.

Still, by strictly controlling the value of its currency, China's signal to the world is: We want to export to you for the good of our own recovery, not yours. That beggar-thy-neighbor agenda encourages others to pursue similar policies. On Sept. 15, Japan intervened in currency markets for the first time in six years to depress the value of a rising yen, hoping to help its exporters compete with those from China and elsewhere. That raises the specter of a round of competitive devaluations just the kind of mercantilist nightmare that could derail the already shaky recovery from the Great Recession. By maintaining an undervalued yuan, moreover, Beijing is hurting poorer countries. The cheap yuan stunts their export sectors by keeping Chinese manufactured goods competitive vs. rival products from emerging economies with lower costs.

Most of all, China should reform its yuan policy for its own good. Policymakers fret that a sharp increase in the yuan's value would undercut the nation's export machine and cost valuable jobs. Yet China's past experience with yuan appreciation shows that its exporters can survive, and even thrive, not least because imported components and raw materials cost less. Beijing dreams of the yuan becoming a force in global trade and finance; that will never materialize unless the government loosens its grip. A stronger yuan would also pressure Chinese companies to become more efficient and high tech, which is a major goal of Beijing's. And it would help with the crucial transformation of China's invest-and-export growth engine to one based more on domestic consumption. That would make the economy less reliant on global demand, state spending and debt-driven investment.

A stronger yuan is good for just about everybody. Until Beijing awakes to that reality, China's controversial currency will remain a flash point in the country's relations with the rest of the world and an impediment to global economic progress.