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China: Why It Was Not Going For Revaluation For Its Currency

1356 words - 5 pages

Pressure on china to revalue its currency was mounting. EU and even Japan to pressurized China to revalue its currency had joined U.S. Recall that china received plaudits during the Asian crisis for maintaining stable exchange rate policy and avoiding competitive devaluation. Then, why Chinese currency was now blamed for global imbalances?World's dependence on US for growth has been increasing and it played disproportionately larger share in world growth throughout 90's. Japan has long its status as growth engine and EU's economic growth has been sluggish. But the equation has somewhat changed lately. For the first time, all three major drivers [US, EU & Japan] of world economic growth are suffering. In this situation, china and to some extent India have emerged as bright spots, showing high growth rates. If one were to go by "official" growth figures of china, over last two decades, it represents the most stunning growth story in human history.UNDERSTANDING CHINA'S ENIGMATIC GROWTHVarious factors that have contributed to Chinese growth:1) Conducive investment environment - fixed exchange rate system, preferential taxtreatment2) Cheaplabor3) World-class infrastructure, etc.All these factors, over period of time have made China-the world's factory. Major MNC are shifting their production base to china, enabling them to drastically reduce their cost of production. Central banks today are worried more about deflation than inflation.Exports and heavy investment by government in infrastructure have been major drivers of china's economic growth. According to observation made by Stephen Roach of Morgan Stanley, 65% of china's growth could be traceable to export during last 3 years. While investment share of GDP rose to 42% in 2002, which is not good for the long run sustenance. Domestic demand has to play larger role.BEIJING'S DILEMMAWHAT IF CHINA WERE TO REVALUE THE YUAN?Export has been one of the major drivers of china's growth, appreciation of Renminbi might hurt it. Manufacturing goods form major part of Chinese export. To what extent exports will be hurt through Yuan revaluation is open to question, since no country in world come close to china in terms of providing cheaper cost structure. One really wonders if appreciating Yuan, let say by 15-20% would affect china's cost structure because labor cost in china is 5-10% of US's labor cost and much below other developing countries.Out of a population of 1.3 billion, at least 30 million are thought to be unemployed in the cities. A further 150 million or so former rural residents are thought to be roaming from job to job in urban areas. At least another 200 million people remain on the land but have virtually no work to do. Export sector has been providing employment on a huge scale. Beijing would not like to hurt this sector through Renminbi appreciation.Any revaluation of Yuan, at a time when domestic financial system is weak could be suicidal.IMPLICATIONS ON USChina was the 2nd largest...

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