Antoaneta Bezlova

Despite repeated calls by the US and other western powers for an upward revaluation of the Chinese currency, the yuan, Beijing has refused to budge on its stance that the currency is a matter of national sovereignty — meaning that increased pressure from abroad is likely to provoke greater resistance to change. But behind the defiance, Beijing is preparing the financial system for a more flexible currency system that would allow the yuan to fluctuate within a wider band. Since 1994, China has fixed the yuan at about 8.28 to one US dollar, intervening to prevent any large fluctuation. Ironically, Beijing’s readiness to act on the currency front comes just as many in the US are beginning to realise that while calls to revalue the yuan have a strong populist appeal, revaluation would have only a limited effect on the US trade deficit with China, valued at $160 billion.

US Federal Reserve Chairman Alan Greenspan warned Congress last week that a rush to impose punitive tariffs on imports from China would harm US consumers and protect “few, if any American jobs”. US manufacturers contend the Chinese currency is undervalued by as much as 40 percent, making the country’s goods cheaper in the US market and US products more expensive in China. Some lawmakers have forwarded a proposal to impose hefty 27.5 per cent tariffs on imported Chinese goods if Beijing does not move to a more flexible currency system. According to former US senator, democrat Bob Kerrey, understanding is growing in the United States that forcing a Chinese currency revaluation will not be a panacea for US economic pains. For China, this and Greenspan’s warning justify the government’s intransigence on the currency. Chinese economists have long agreed the US has little to gain economically from a higher (yuan), either in terms of protecting its manufacturing industries or reducing its current account deficit, which they argue is a legacy of US consumers piling up debt to finance consumption now.

To Beijing, therefore, US pressure stems more from the need to find a scapegoat for what are largely self-inflicted economic wounds than from the “currency manipulation” of which China is often accused. This is why there is more than a tinge of self-righteousness in Beijing’s refusal to cave in to US demands. Time and again, Chinese leaders have insisted that revaluing the currency is a sovereign matter and that pressure “will not help solve the matter”. The authorities fear that any significant move on the currency front could trigger a wave of money flooding into the country, fuelling inflation and sending stock markets into an uncontrollable spin. The National Bureau of Statistics has estimated that a 15 per cent revaluation could turn export growth negative this year. A 3 to 5 per cent revaluation would slow export growth to less than 10 per cent in 2005. Such changes would surely result in such potentially serious consequences as unemployment and even social unrest. —IPS