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Business
Print Edition> Business
UPDATED: April 3, 2010 NO. 14 APRIL 8, 2010
Consensus for Continuance
 
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The goal of the U.S. Government to double exports in the next five years will be difficult to realize. It hasn't been done since the 1970s, and that was driven in large part by inflation. It also depends on robust growth abroad, which is beyond the control of even this president. Faster export growth would be good for the U.S. economy, but it will not put much of a dent in its high unemployment.

Uncertainties Loom

Yi Xianrong, a senior researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences

As the Chinese economy on its path to recovery, appreciating the yuan will only be a stumbling stone.

It will hurt the competitive edge of exports by making Chinese goods less affordable overseas. This is a deadly blow to exporters who have only recently started to see rays of hope after painful gloom.

More disturbing, though, is the risk that international speculative hot money will pour into China, expecting a risk-free source of profit from gains in the value of the yuan.

With history as a guide, the consequences of a stronger yuan are monumental. In 2005, China ended its peg of the yuan to the U.S. dollar, a step that resulted in a rapid appreciation of the currency and put many coastal exporters at risk of hemorrhaging money. This was the biggest setback to the Chinese economy at that time, though grossly overshadowed by the ensuing financial storm.

Financial woes were no less acute between 2005 and 2007. Torrents of hot money snuck in, stoking up asset bubbles and sowing the seeds for a downturn of the broader economy in the latter half of 2008.

A Stable Yuan Is Key

Zhou Shijian, a senior researcher with the Center for U.S.-China Relations at Tsinghua University

Even if China appreciates the yuan by 40 percent, U.S. trade deficits with the China would by no means decrease. From 2005 to 2008, the yuan gained 21 percent while the deficits increased 49.6 percent defiantly.

By pointing fingers at the Chinese currency, the U.S. Government just wants to find a scapegoat for growing domestic unemployment. Meanwhile, we cannot rule out the possibility that it is trying to slow down the Chinese economic juggernaut.

Of course the currency appreciation will provide a powerful catalyst for Chinese exporters to upgrade technologies and focus on higher-end products. But the advancement should be a gradual process that leaves a breathing space for enterprises to restructure themselves.

China should cap annual appreciation of the yuan under 3 percent to provide a stable environment for the economy to grow.

Japanese Lesson?

Ha Jiming, chief economist with China International Capital Corp. Ltd.

What will happen if China sharply appreciates its currency? A close look at Japan's experience could provide some insight.

After giving in to U.S. pressure to strengthen its currency in the 1980s, Japan paid a terrible economic price. The Japanese yen almost doubled in value between 1985 and 1987, putting exporters on a tight spot.

By slashing the interest rate to a record low, the government tried to make up for a collapse in exports. But the massive cheap credit did not find its way into manufacturing or services as expected. Instead, property markets absorbed the cash, thus sending house prices skyrocketing. The bubble eventually popped in the early 1990s, leaving the economy in a decade-long state of malaise.

China has a reason to worry about a Japan-style crunch. Its number of home buyers is estimated to start shrinking in 2015, similar to what Japan experienced around 1990.

In addition, China's export sector would be more vulnerable to currency appreciation than Japan—it has few global brands to rely on.

Businesses at Risk

Gao Peikun, General Manager of Beijing Garments Import & Export Corp.

If the yuan strengthens 3 percent over three months this year, our company will come under significant financial pressure or even be forced into bankruptcy.

In defense of the possible rise of the yuan, exporters usually have only three countermeasures available. The first is to increase export price. The second is to strengthen operational efficiency and save costs, or move up the value chain to sharpen their competitive edge. The third is to hedge against the exchange risks by buying export credit insurance.

But 95 percent of Chinese exporters are lower-end original equipment manufacturers and have little say in pricing. So they can hardly increase prices and would otherwise lose orders to Viet Nam, India and Pakistan.

In addition, few enterprises are now interested in export credit insurance. The coverage rate of export credit insurance in China was only 9.7 percent in 2009, well below the world average of 15 percent. The biggest problem was there were few financial products being offered and the charge was staggeringly high.

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