EMAIL DETAILS

Why China Is Unwilling to Revalue the Yuan
with 3 comments

The following guest post was contributed by Ian Lamont, an MIT Sloan
Fellow. He was previously the managing editor of the Industry
Standard, and has also researched China’s state-run media and
communications policies.

For years, China has been subject to enormous external pressure to
increase the value of its currency, or let it float on the open
market. While doing so might relieve pressure on foreign economies by
boosting their exports and reducing trade deficits, it runs counter to
Beijing’s domestic priorities, which involve doing everything it can
to preserve economic growth and domestic stability, and by extension,
its hold on political power.

All countries exploit the dynamics between their political and
economic systems. But China’s situation is exceptional. For three
decades, the government of the People’s Republic of China has
perpetuated a grand political dream, claiming a single-party political
mandate from the Communist ideals espoused by Mao Zedong, while
simultaneously drawing power from the capitalist canon. Beijing has
been able to pull it off, largely through the promise of spreading
wealth and opportunities to even the poorest of villages and
maintaining benefits for cadres and workers in state-owned enterprises
which cannot easily be absorbed into the capitalist system. A high
rate of GDP growth is required year after year to maintain this state
of affairs.

A sudden change in the value of the Yuan could have the effect of
throwing a wrench into the works, potentially setting off a chain
reaction of factory closures and layoffs across the interconnected
networks that drive China’s export-oriented economy. In the short
term, China might be able manipulate legislation, the banking sector,
and welfare levers to prop up key industries or regions. But in the
long term, it is uncertain if these steps would be enough to preserve
social stability or continued loyalty to the Communist Party.

What sorts of domestic consequences would result from a slight uptick
in the value of the Yuan? The currency is now trading at about 6.7
renminbi to the U.S. dollar. At the very least, Chinese exports would
become slightly more expensive to foreign buyers. The resulting drop
in Chinese exports would put marginal factories out of business and
put their workers on the streets. Other companies wouldshift low-wage
manufacturing to countries such as Vietnam and Sri Lanka. In the
industrial parks around Shenzhen, the unemployed could be reabsorbed
into the local manufacturing economy. In remote interior provinces,
where economic institutions are less developed, there would be fewer
opportunities, and a corresponding rise in poverty, anti-government
feeling, and isolated “mass incidents.”

But what would happen in the case of extreme economic disruption,
prompted by a sharp change in the exchange rate, the currency openly
floating on the world market, or some other unforeseen effect of a
revaluation? The social and political turmoil unleashed by a sharp,
sudden slowdown of the Chinese economy could potentially lead to
Tiananmen Square-scale protests, widespread domestic instability, and
an exodus of migrants or refugees to neighboring countries and overseas.

China is not attempting to hide its fears. “Any significant
appreciation of the renminbi will erode China’s export competitiveness
overnight and impact the livelihood of tens of millions of
workers,”notes an editorial authored by the pro-government China Daily
and republished in China’s state-run news agency in May. The essay
further describes two economic goals: To maintain a target GDP growth
of 8 percent per year (a level it has achieved nearly every year for
the past two decades) and contain China’s consumer price index (which
it tries to keep under 3%).

Additional factors may influence China’s currency policy in the short
term. One concern is foreign policy, such as relations with key
trading partners. Another is nationalist sentiment, which the
Communist government has manipulated to support its own hold on power.
Economic injustices inflicted by foreign powers on China in the 19th
and early 20th centuries — such as the treaty ports system — still
play a role in China’s nationalist propaganda. These humiliations
require the current generation of Chinese leaders to tread carefully
around policy changes that could be viewed as kowtowing to foreign
demands.

So, for foreign governments, companies, and labor groups expecting
China to allow its currency to appreciate, there may be no significant
movement until China’s back is truly against the wall — or the
leadership in Beijing can find a face-saving way to convincingly
portray a revaluation as an advance demanded by its people, as opposed
to a policy shift dictated by foreigners. In addition, China’s trading
partners need to be aware that a change in the value of the Yuan will
not by itself erase their trade deficits or reduce their dependence on
cheap manufactured goods from abroad. Such a shift may even lead to
problems that have long-lasting implications for China’s people and
the global economy.