The Pressure Will Continue to Rise

Without losing face, China bent somewhat to political pressure from the United States and Europe, and began what may eventually be a global devaluation of its currency, the yuan.

 Last Thursday, China, in the face of political pressure, decided to adopt a more flexible exchange system for its yuan that will see the currency move in relation to a basket of foreign currencies. While this is a step forward for China to appease its global trading partners, who are recording significant trade deficits with China, the effect may still be relatively muted.

 The United States’ perspective, feeling the yuan was extremely undervalued by as much as 40%, was that a stronger Yuan would make the massive market for Chinese imports more expensive and would help to improve ailing domestic companies and protect jobs in the U.S. This did not happen yet, and I do not expect it to happen in the near future.

 The reality is that China is in a superlative growth phase and will not do anything that could significantly alter its current economic structure.

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 The reaction from the White House was cautiously optimistic, but I very much doubt the recent change to the yuan will have any major impact on China or the United States, as far as Chinese imports and offshore manufacturing go. But, it is a start that saves face for China.

 And at the end of the day, China will be able to be a fairer partner in global trade. However, if you are expecting a significant reduction in the U.S. trade deficit with China, think again. The deficit will continue and could rise even further, as China will continue to have significant cost advantages over the U.S.

 U.S. manufacturers of textiles, toys, furniture, and other currency sensitive goods will continue to face pressure at home. China may face less pressure on Capital Hill, but don’t expect the same from domestic manufacturers. As the Chinese deficit continues to rise, so will the pressure.