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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (2411)	1/8/2004 7:41:13 PM
From: RealMuLan	Read Replies (1) \| Respond to of 6370

China cannot yield on currency Milton Ezrati IHT Thursday, January 8, 2004 Resisting the U.S. NEW YORK Beijing cannot and will not yield to pressure from the United States or anyone else to let its currency rise against the dollar. China simply has too urgent a need to create jobs for its people to surrender any engine of economic growth, most especially the practice of promoting exports with a cheap currency. . If China were to bow to U.S. demands and let the yuan rise, it would risk a slowdown in export growth, an explosion in the ranks of the unemployed, and the host of social and economic ills that would follow. For China's leadership, this prospect is far more threatening than anything the United States and other trading partners can impose. . A cursory look at the data reveals China's critical need for job growth. Urban unemployment rates already hover near 10 percent. The natural growth of the nation's huge work force produces about 4.5 million new job seekers a year. What is more, half the population still lives in rural communities, underemployed and underpaid in agriculture. Four million to seven million of these people a year flow into urban centers in search of better jobs. . Between these forces and a desire to reduce the ranks of the unemployed, China faces a need to create about one million new jobs a month, a tall order even for a large economy and one that compels the authorities to sustain growth at any cost. . Of course, China, as a new member of the World Trade Organization, would like to cooperate with the United States, the Group of Eight industrialized countries, and the Asia-Pacific Economic Cooperation forum. Doubtless for that reason, the governor of China's central bank, Zhou Xiaochuan, has conceded that some day China will have to give up its present policy and allow the yuan to float up freely on foreign exchange markets. But that day will not arrive for a long time, not, in fact, until that distant date when China abandons its export-based growth model. In the extended meantime, China will apologize and explain. It might even make gestures to placate the rest of the world. But it will continue to resist any substantive upward pressure on its currency. . For the time being then, whatever the United States or the Group of Eight wants, China's central bank will continue to intervene in foreign exchange markets. It will buy dollars from Americans and sell them the yuan they seek to satisfy their appetite for Chinese exports. In so doing, China will neutralize any upward pressure on the price of its currency, keep China's goods inexpensive to Americans, and so sustain export growth. . The practice will, of course, force China to collect a huge surplus of dollars. Since it cannot sell these dollars without upsetting this careful currency balance, China will have little choice but to enlarge its already substantial portfolio of U.S. Treasury notes and bonds. The Chinese know that it is poor investment strategy to load up on Treasury debt, but from their point of view, the investment risk is a small price to pay to maintain the export-based growth model. . China's cheap yuan policy will, of course, cost the United States. As long as China persists in this course, American producers will face a competitive disadvantage and the United States will lose jobs accordingly. That is why Washington pressured Beijing in the first place. But these circumstances are not all pain for America. China's policy sustains a flow of inexpensive goods to American consumers. It also keeps China a ready buyer of U.S. Treasury debt, an especially useful prospect in these days of bloated budget deficits. . The writer is senior economist and strategist for Lord, Abbett Co. and author of "Kawari: How Japan's Economic and Cultural Transformation Will Alter the Balance of Power Among Nations." iht.com