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Yuan Rise Could Bloody China, Experts Warn
October 10, 2010
Ian Sloan, economics fellow at the Massachusetts Institute of Technology, stressed that the legitimacy of China’s communist rulers rests on guaranteeing rapid economic growth year after year.
Beijing. A sharp revaluation in the yuan would trigger factory closures and job losses in China, analysts say, backing up the government’s defense of its controversial exchange-rate policy.
Prime Minister Wen Jiabao told European leaders last week that the 20 percent to 40 percent rise demanded by critics would destroy Chinese companies and lead to social upheaval by triggering widespread unemployment.
The premier’s claims have merit, experts say, warning that any dramatic shift in the value of the yuan would be harmful not only to export-driven China but also to a global economy struggling to recover.
“If suddenly or within a few months China’s yuan is revalued by such an amount, most companies in the export sector will be out of business,” said Lu Ting, a Hong Kong-based economist for Bank of America Merrill Lynch.
“It does not make sense for any country to have a very big one-off revaluation in such a short time unless they are in a really big mess.”
China appeared to bow to international pressure for a stronger currency in June, promising to let the yuan trade more freely against the dollar while ruling out large market fluctuations.
Since then, the yuan has only gained around 2 percent against the greenback.
In Brussels, Wen countered that many Chinese exporters had profit margins of just two to 3 percent, and told his critics to back down.
“Should the yuan appreciate by 20 to 40 percent, as demanded by some people, a large number of Chinese export enterprises will go bankrupt, the workers will lose their jobs making it hard for society to remain stable,” Wen said.
“The world will by no means benefit from a crisis in the Chinese economy,” he added, pledging to “gradually allow more flexibility in the yuan exchange rate while maintaining its basic stability.”
China’s top central banker Zhou Xiaochuan said on Friday that the yuan would move gradually toward “equilibrium” but rejected any “shock therapy.”
Ian Sloan, an economics fellow at the Massachusetts Institute of Technology, stressed that the legitimacy of China’s communist rulers rests on guaranteeing rapid economic growth year after year.
“In the short term, China might be able to manipulate legislation, the banking sector, and welfare levers to prop up key industries or regions.
“But in the long term, it is uncertain if these steps would be enough to preserve social stability or continued loyalty to the Communist Party,” Sloan wrote in a blog post.
Hong Kong-based Credit Suisse economist Tao Dong said: “I think a rapid currency appreciation would probably do damage to the Chinese export sector, which typically is a low-margin business.”
The US passed a bill last month inviting the government to consider China’s currency policy as an improper trade subsidy, allowing the Commerce Department to slap retaliatory tariffs on Chinese goods.
China’s trade surplus shrank to $20.03 billion in August as imports accelerated, growing 35.2 percent year-on-year while the growth of exports slowed to 34.4 percent.
Agence France-Presse
October 10, 2010
Ian Sloan, economics fellow at the Massachusetts Institute of Technology, stressed that the legitimacy of China’s communist rulers rests on guaranteeing rapid economic growth year after year.
Beijing. A sharp revaluation in the yuan would trigger factory closures and job losses in China, analysts say, backing up the government’s defense of its controversial exchange-rate policy.
Prime Minister Wen Jiabao told European leaders last week that the 20 percent to 40 percent rise demanded by critics would destroy Chinese companies and lead to social upheaval by triggering widespread unemployment.
The premier’s claims have merit, experts say, warning that any dramatic shift in the value of the yuan would be harmful not only to export-driven China but also to a global economy struggling to recover.
“If suddenly or within a few months China’s yuan is revalued by such an amount, most companies in the export sector will be out of business,” said Lu Ting, a Hong Kong-based economist for Bank of America Merrill Lynch.
“It does not make sense for any country to have a very big one-off revaluation in such a short time unless they are in a really big mess.”
China appeared to bow to international pressure for a stronger currency in June, promising to let the yuan trade more freely against the dollar while ruling out large market fluctuations.
Since then, the yuan has only gained around 2 percent against the greenback.
In Brussels, Wen countered that many Chinese exporters had profit margins of just two to 3 percent, and told his critics to back down.
“Should the yuan appreciate by 20 to 40 percent, as demanded by some people, a large number of Chinese export enterprises will go bankrupt, the workers will lose their jobs making it hard for society to remain stable,” Wen said.
“The world will by no means benefit from a crisis in the Chinese economy,” he added, pledging to “gradually allow more flexibility in the yuan exchange rate while maintaining its basic stability.”
China’s top central banker Zhou Xiaochuan said on Friday that the yuan would move gradually toward “equilibrium” but rejected any “shock therapy.”
Ian Sloan, an economics fellow at the Massachusetts Institute of Technology, stressed that the legitimacy of China’s communist rulers rests on guaranteeing rapid economic growth year after year.
“In the short term, China might be able to manipulate legislation, the banking sector, and welfare levers to prop up key industries or regions.
“But in the long term, it is uncertain if these steps would be enough to preserve social stability or continued loyalty to the Communist Party,” Sloan wrote in a blog post.
Hong Kong-based Credit Suisse economist Tao Dong said: “I think a rapid currency appreciation would probably do damage to the Chinese export sector, which typically is a low-margin business.”
The US passed a bill last month inviting the government to consider China’s currency policy as an improper trade subsidy, allowing the Commerce Department to slap retaliatory tariffs on Chinese goods.
China’s trade surplus shrank to $20.03 billion in August as imports accelerated, growing 35.2 percent year-on-year while the growth of exports slowed to 34.4 percent.
Agence France-Presse
