China learns the currency game
Commentary: What comes around, goes around
By Allen Wan, CBS.MarketWatch.com
Last Update: 7:54 PM ET Feb. 23, 2003
WASHINGTON (CBS.MW) -- One of the more interesting developments at this weekend's G7 summit meeting in Paris is Japan criticizing China for using its currency to boost its exports at the expense of its global rivals.
It's ironic as Tokyo has used -- and still uses -- the same weak-currency strategy to incredible success over the years. Ask the United States, which adopted "managed trade" and other protectionist measures to fend off the Japanese export machine.
In Paris, Japanese Finance Minister Masajuro Shiokawa urged the world's richest nations to pressure China to drop its currency peg to the dollar -- which has been locked at around 8 yuan to the greenback since 1994. To the chagrin of the Chinese, the rival Japanese are attracting listeners as the U.S. and Europe indicated support for such a move.
Japan's probably right
As funny as it to see the Japanese squirm as the Chinese beats it at its own game, they make a compelling argument for a revalued yuan currency -- stopping global deflation, for one. They say product prices have been kept inordinately low as result of a flood of cheap manufactured goods from China.
Here are some others: with annual growth at around 8 percent over the past decade, China has emerged as the world's sixth biggest economy -- with no currency appreciation to show for it.
A weak currency has also helped Beijing build a huge unsustainable trade surplus with the rest of the world. The surplus with the U.S. topped $100 billion last year -- a fact that President Bush and his economic team will probably address when Iraq and North Korea are no longer a distraction.
The Americans won't be the only ones miffed at Chinese trade practices. The Europeans have seen their euro currency soar to four-year highs against the dollar in recent months in what one major brokerage attributed to the yuan's lack of flexibility. The argument is this -- as pessimism grows over the U.S. economy and the stock market, dollar investments should be flowing into stronger economies like China's. However, its currency, which is not convertible, prevents that from happening. Instead, currency speculators take refuge in the euro as the best of more unpalatable places to park their cash.
It's probably impossible for Beijing to slash the value of the country's currency overnight -- a la the Plaza Accord of 1985 -- without deep and harmful implications for the Chinese economy.
The country's central bank is forecasting 7 percent growth this year -- below the decade average -- at a time when uncompetitive state industries restructure to abide by World Trade Organization's strict entry requirements.
China: The reluctant fourth wheel
It may not, however, take much to ask the Chinese to experiment with a slight appreciation of its currency as part of broader measures to stimulate growth, along with foreign investment and economic reform.
At a recent Asia Business Conference held at the Harvard Business School, noted Harvard University sinologist Ezra Vogel said that it's becoming clear that China is becoming the reluctant fourth wheel of the global economy after the U.S., Europe and Japan, especially given the important role it plays in Southeast Asia.
The question is whether China is willing to play that role -- something not all observers think it wants. "I think China can play a bigger economic role than political," said Legend Holdings Chief Financial Officer Mary Ma. "But the focus is still on its own development."
Allen Wan is a news editor for CBS.MarketWatch.com in New York. |
