Thursday, March 11, 2004
Why China acts to fix the price of the Yuan
China might allow more flexibility of the Yuan in future, but at present, they seem dedicated to keeping the Yuan within a fairly stable price range vis a vis the dollar.
To many, that is unfair, an example of a "beggar they neighbor" policy wherein Chinese imports are kept at an artificially low level in order to encourage exports.
To some degree, I'm sure that weighs on China's mind, but I think the FAR bigger reason China fears a devaluation of the Yuan is the effect that would have on external investment in China. If the Yuan starts to fluctuate wildly, if not take a nose dive, foreign investment could dry up, and there could be capital flight from China. The engine of Chinese growth is built on foreign investment, and thus, the bigger fear for China is that they will suddenly find the engine of their growth sputtering to a halt.
China is one of the bright spots on the balance sheet of most companies in the world these days. A China that hits a brick wall would do bad things for the global recovery.
Does China need to start to move towards a more flexible exchange rate policy? Yes. But haste is the WRONG answer. China is digesting the effects of explosive growth, and we need to give them a bit of room to adjust their policies. Keep pressure on them to provide more room for the Yuan to adjust against the dollar...but show some patience. Unfortunately, that's probably not the message that the Bush administration wants to hear, with an eye on November elections and an opponent trying to use a sour economy as a weapon against him.
China might allow more flexibility of the Yuan in future, but at present, they seem dedicated to keeping the Yuan within a fairly stable price range vis a vis the dollar.
To many, that is unfair, an example of a "beggar they neighbor" policy wherein Chinese imports are kept at an artificially low level in order to encourage exports.
To some degree, I'm sure that weighs on China's mind, but I think the FAR bigger reason China fears a devaluation of the Yuan is the effect that would have on external investment in China. If the Yuan starts to fluctuate wildly, if not take a nose dive, foreign investment could dry up, and there could be capital flight from China. The engine of Chinese growth is built on foreign investment, and thus, the bigger fear for China is that they will suddenly find the engine of their growth sputtering to a halt.
China is one of the bright spots on the balance sheet of most companies in the world these days. A China that hits a brick wall would do bad things for the global recovery.
Does China need to start to move towards a more flexible exchange rate policy? Yes. But haste is the WRONG answer. China is digesting the effects of explosive growth, and we need to give them a bit of room to adjust their policies. Keep pressure on them to provide more room for the Yuan to adjust against the dollar...but show some patience. Unfortunately, that's probably not the message that the Bush administration wants to hear, with an eye on November elections and an opponent trying to use a sour economy as a weapon against him.
