Beijing's currency conundrum
By Francesco Sisci
BEIJING - Despite world headlines indicating heavy pressure, US Treasury Secretary John T Snow in his visit to Beijing last week actually pressed the yuan-revaluation issue quite softly. He returned to the United States with a promise of a future liberalization of exchange rates and with a cut of tax rebates on exports, which whittles down Chinese commodity competitiveness by some 5 percent.
Chinese companies will be allowed to hold more cash, and thus surrender less of it to the central bank, and Chinese tourists will be able to take, and spend, more money abroad, removing some steam from the present revaluation pressures. Most important, the Chinese will buy more US Treasury bonds.
This is a high prize. Next to Japan, China is the United States' largest purchaser of bonds, but in the past couple of years China had been dreaming of a strong euro and strong ties with Europe and thus had been buying more euros. However, this could be a good time to sell into the euro's strength, which is diminishing, at least temporarily. The Chinese purchase of US bonds can guarantee that interest rates are low and China's continuing economic expansion will be financed. The cheap yuan also guarantees that Chinese imports won't become expensive and thus trigger perhaps a new round of inflation in the United States.
On the other hand, many US economists are clear that the US jobs lost to China won't be recovered with yuan revaluation: they are lost forever. If they go anywhere, these jobs will go to India, or Mexico, or Myanmar, if and when the yuan makes these exports uncompetitive. In the present situation, despite the official populist rhetoric, the United States has no real interest in a short-term revaluation of the yuan per se that could create more problems than it solves. There is long-term interest in the free exchange of the yuan, but this is a different and more complicated kettle of fish. In any case, once the exchange is free, it is not certain that the yuan will be revalued upward.
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