Chinese Yuan vs. the US demand - Economics Theory

The conventional wisdom is that once the value of the Chinese Yuan is increased, the USA’s trade deficit with China would start falling. This reasoning has prompted many Americans to push for further, faster revaluation of the Yuan even after China changed its currency policy.

For those who endorse this rationale, the Yuan’s value is a paramount factor behind China’s, and their country’s trade balances.

But for John Ross, former deputy mayor of London in charge of economic and business policy, the trade gap between a country and China would widen instead of narrowing down, at least in the short term, if the Yuan’s values go up.

Mr. Ross, a visiting professor at Antai College of Economics and Management in Shanghai Jiaotong University, says that once the Yuan’s value rises the Americans would demand further revaluation, ultimately forcing the Yuan to rise to a level that would not only disrupt China’s trade and economy, but also pose a threat to the entire World’s economy.

Moreover, the number of jobs in the US would not increase unless the federal government changes its economic policy and raises investments, which is the real solution to its problem. Pressuring China to raise the Yuan’s value sharply will not help. “Most people, particularly those abroad, don’t know the real situation. The reason they want the Yuan to be revaluated further is because they think it would reduce China’s trade surplus, this is simply not true.”

From what happened between Y’s 2005 and 2008, when the Yuan rose 21% against the USD, it’s clear that China’s “trade surplus rose, too”, Ross said. Any revaluation of the Yuan raises the price of exports and reduces the price of imports, which means China’s trade surplus would get bigger as its currency rises.

By examining historical data, Ross has found that China’s exports and imports grew simultaneously after Y 2005 in terms of volume, but the prices of exports rose more relative to import thanks to the revaluation of the yuan. “That’s why its trade surplus with the USA is bigger today.”

There’s a big debate among economists over what would happen in the long term if the Yuan rose further, he says. Some people think China’s trade surplus would increase, while others think it would fall in the long run. “But there’s no difference in what they say would happen in the short term.”

Seen from the history of US trade, its overall trade deficit rose at nearly US$70B a month until Y 2006, he says. Then it stabilized before rising again after the passage of the worst period of the Global financial crisis. “That’s why the American people are getting agitated because it has worsened, but it is not rising because of China, for, I’m using US figures, not Chinese figures, the trade surplus of China with the US is rather stable, slightly under US$20B a month.”

In other words, claiming that the trade deficit of the US is rising because of China is simply not true, he says. “It’s because its America’s trade deficit with the rest of the world is rising, too.”

The US has a trade deficit with about 90 countries. “If you reduce its trade deficit with China, all that would happen is that its trade deficit with some other country would increase.”

US hawks, however, have always targeted China and pressured it to dance to the tune of their demand. Even if China has pledged to make the yuan more flexible by reforming its exchange rate mechanism further and peg it to a basket of currencies to better reflect the demand of the market, some US politicians and industrial leaders say it’s “too little too late” and demand the Chinese currency be revaluated by up to 40 percent.

Forcing the value of the yuan to rise would cause further uncertainties in the world economy, which today faces other big challenges such as the European Union debt crisis. “We are not (living) in a normal stable economic environment; we are just about recovering from a very bad financial crisis and what happens in the next 6 to 18 months is very important and would have a very big effect,” he says. “The last thing the world needs at present is a short-term increase in China’s trade surplus because of an increase in the value of the yuan.”

A look at global economic developments Economic Theory

A look at economic developments and activity in major stock markets around the world Thursday:

SHANGHAI — Slowing global demand and a retreat from stimulus policies led to a weakening in China's manufacturing in June for a third month.

Reports from Market Economics also indicated that manufacturing sector growth in India, South Korea, Australia and Taiwan was slowing.

In Asian markets, Japan's benchmark Nikkei 225 stock index closed down 2 percent, South Korea's Kospi index shed 0.7 percent, Australia's S&P/ASX 200 tumbled 1.5 percent and markets in Singapore, Malaysia and Taiwan also fell.

BERLIN — The European Central Bank said it is lending 111.2 billion euros ($136.7 billion) to banks in a six-day tender, completing an effort to smooth over the expiry of a record batch of loans.

The ECB said 78 banks subscribed to the operation, conducted as 442 billion euros in credit granted a year ago to support banks during the financial crisis expired.

That came after the central bank said Wednesday it would lend a lower-than-expected 131.9 billion euros to banks for three months. Neither the banks nor their nationalities were identified.

The outcome of the longer-term auction suggested that banks' cash needs are easing despite lingering worries about the impact of the eurozone debt crisis. More than 1,100 banks subscribed to last June's unusual 12-month operation.

LONDON — The industrial sector's growth cooled slightly in the 16 countries using the euro and the United Kingdom, according to manufacturing surveys.

European stocks fell. The FTSE 100 index of leading British shares closed down 2.3 percent, Germany's DAX dropped 1.8 percent and France's CAC-40 fell 3.

TOKYO — Major Japanese manufacturers, riding high from a booming Asia, haven't felt this good for a long time. Business confidence improved for a fifth straight quarter and was in positive territory for the first time in two years.

LONDON — The Bank of England says the amount of secured credit available to households increased slightly in the second quarter, but lenders say it might be more scarce in the July-September quarter.

BERLIN — A small rise in retail sales offered a hopeful sign for Germany's long-sluggish domestic demand, even as the country's economy minister mounted a robust defense of its export-heavy recipe for success.

MADRID — Spain successfully raised 3.5 billion euros ($4.3 billion) in an oversubscribed bond sale, a reassuring sign for markets a day after ratings agency Moody's warned it may join others in downgrading the country's debt.

BEIJING — A Chinese company canceled a $2.5 billion project to develop a bauxite mine in Australia, blaming difficult conditions in the global industry.

TIANJIN, China — Workers at a Japanese-owned electronics factory in the northern Chinese city of Tianjin were on strike over pay and benefits for a third day, the latest in a spate of labor disputes as an increasingly restive work force demands better conditions.

STOCKHOLM — The Swedish central bank raised its key interest rate for the first time in two years, saying the economy is recovering strongly from last year's global downturn.

The Riksbank raised the key repo rate by a quarter percentage point to 0.5 percent.

ATHENS, Greece — Prices of consumer goods and services have risen overnight in Greece, as a new sales tax hike takes effect in an effort to boost government finances.

SINGAPORE — Singapore real estate prices jumped to a record high in the second quarter as the city-state's economic recovery broadened.

NAIROBI, Kenya — Five nations in East Africa implemented new economic rules to boost cross-border employment and trade.

The new steps push forward a larger plan to integrate the economies of Burundi, Kenya, Rwanda, Tanzania and Uganda, which together form the East African Community.

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