Last Wednesday, May 11, 2005, China’s People’s Daily newspaper reported that the Central Bank planned to revalue the Yuan on May 18, 2005.
Speculators around the world applauded the news.
Some predicted the Yuan would increase in value by 40% or more, and initiated strong buying in the currency, anticipating a good return on investment when the Yuan would begin trading freely in the currency market.
Many North Americans were also pleased with the announcement, expecting that as the Yuan moved up in value, Chinese exports would cost more, thereby encouraging more domestic spending and a strengthening of the local economy.
On Friday, May 13, 2005, however, the Governor of the People’s Bank of China, China’s Central Bank, Zhou Xiaochuan cleared up the situation, commenting that “The media report on the expected appreciation of the Chinese currency… is not correct.” Vice Governor Wu Xiaoling also confirmed that the pressure from the U.S., Europe, Japan, and speculators everywhere would not influence China’s decision to not revalue the Yuan at this time. The People’s Daily admitted its error and said the story it quoted was mistranslated.
Since 1995, China’s currency policy has held the value of the Yuan at 8.28 per U.S. dollar. While it is clear that the currency is artificially low, China sees the undervalued currency as a strategy to repair its troubled banks, which are suffering from billions of dollars of bad debt, and to keep its workers employed in a bustling manufacturing export sector.
Chinese Central Bank reports have made it very clear that the country will not even consider revaluing the Yuan until the banks’ future is more stable and until speculation ceases.
Of course, the inflationary pressures are mounting: China reported a trade surplus of $4.59 billion in April and $21.2 billion for first four months of 2005, and producer price inflation is 5.8% for the year to date through April due to rising fuel and raw material costs. Yonghao Pu, head of Asia research at Swiss Bank UBS in Hong Kong, said, “I am quite sure inflationary pressure is in the pipeline.” Just yesterday, China announced another increase in exports for April.
Market watchers in Canada and the U.S. have been watching China’s economy closely of late — even the U.S. Senate has voted in favor of China letting the Yuan trade freely. If it doesn’t revalue the currency, the U.S. Senate has threatened, America may be forced to impose a strong tariff on imported Chinese goods to try to encourage domestic spending.
The question is, however, whether or not a revalued Yuan will really have the positive effect on us here in North America that some pundits are predicting.
Here’s what I think. Let’s say the Yuan is revalued. We’d probably only see Chinese exports cost 4% or 5% more. The fact is, a small increase in the price of Chinese goods won’t automatically translate into increased spending on domestic goods. The bottom line is that North Americans buy Chinese products because they’re the cheapest. When this is no longer the case, whether this happens next week or next year, people in Canada and the United States will just start purchasing goods from the next cheapest foreign supplier.
The U.S. is running trade deficits with countries in every corner of the globe, so it’s pretty clear that the value of the Yuan isn’t the issue behind America’s suffering economy. It comes down to the North American mentality to spend, spend, spend. The government, the corporate world, and almost every little guy in North America are way over their heads in debt, and a revalued Yuan is not going to repair the damages of our own overspending problems.
An ancient Chinese proverb translates as follows: “There is no never ending banquet under the sun.”
North Americans should keep this proverb in mind while they pile up plate after plate at the all-you-can-eat consumption buffet. Even if the price per plate increases in China, most people around here will just keep on eating until the tragic end to the banquet under the sun comes – and, mark my words, it will.