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Economic & Trade Relations
Special> Sino-U.S. Economic & Trade Relations> Economic & Trade Relations
UPDATED: August 28, 2007 NO.35 AUG.30, 2007
U.S. to Suffer From Sharp RMB Appreciation
The United States should prepare to pay the price as a result of inflationary pressure caused by the sharp renminbi appreciation

Most Americans will naturally attribute the price increase of Chinese imports to the price hikes in China. However, this is not the case. Many people fail to notice that the price increase of Chinese commodities is actually the result of the appreciation of the Chinese currency. Fu Yong, from the China Center For Economic Research of Fudan University, noted in Shanghai Securities News that the United States should prepare to pay the price as a result of inflationary pressure caused by the sharp renminbi appreciation. Excerpts follow:

Americans are used to buying cheap Chinese products, but recently they have noticed some unpleasant changes. May 2007 saw a negative-to-positive change in the average price index for Chinese imports, the first time since 2004. This index increased by 0.6 percent in June. Many people blame this on the price increase in Chinese domestic commodities. There seemed to be clear evidence of this: In May, China's consumer price index growth hit a 27-month high and it continued to climb to 4.4 percent in June and 5.6 percent in July. Many people believe that the price increase in China is spreading globally, and this is becoming an unstable factor for the world economy.

However, this is actually not the case. As far as the United States is concerned, whether Chinese products will boost U.S. commodity prices does not lie in the price change in Chinese commodities, but in how much the prices of Chinese commodities have changed compared to the prices of commodities worldwide. The reason why Chinese commodities can curb world inflation is not that the commodity prices are dropping, but that compared with commodities from other countries, they are much cheaper and are grabbing more market shares in the United States.

In this sense, even if relative prices of Chinese exports begin to rise, as long as the absolute prices are below the world average and as long as Chinese commodities maintain a rise in market share, importing Chinese commodities can help curb U.S. inflation. The Americans must make it clear that what may cause inflation is not the small price increase of Chinese commodities, but their demand for the revaluation of the Chinese currency and their claim to conduct protectionism against China. Such shortsighted actions will eventually make it impossible for them to buy cheap quality Chinese products, something which will affect the average American and increase inflation.

The price increase of China's export commodities does not mean an increase in production costs. What China lacks currently is skilled managers and experienced labor, but it must be made clear that China is the most human resource-rich country in the world. This will not change for at least another two decades. It will take the non-agricultural sectors some time to develop, before Chinese cities can absorb the large amount of rural migrants.

It's necessary to treat the current wage increase in China with care. Wage increases may result from a rising labor cost or a rising productivity of labor. In 2006, Chinese workers had an average wage increase of 15 percent, but when workers begin to move toward higher value-added sectors, the labor productivity will rise sharply. Labor costs, China's biggest advantage, are not waning. Therefore, a commodity price increase that results from the rising labor productivity and added value should not be read as the evidence of the decline of labor resources. That is to say, the price rise of Chinese commodities should not be blamed on the growing labor cost.

The real reason for rising prices of Chinese exports lies in the renminbi's rising value against the greenback. The dollar has, in recent years, entered into a devaluation spiral. As a result, since 2006, the price of imports from most countries, especially from Europe, has risen. Since China reformed its exchange rate formation mechanisms in July 2005, the Chinese currency has appreciated 9 percent against the U.S. dollar. As for such low-profit commodities as toys and clothes, Chinese enterprises have to raise prices in dollar terms. Statistics from Lehman Brothers Holdings show that in the first half of 2007, the dollar price of exported Chinese clothes rose 4 percent, generally the same as the appreciation rate of the renminbi.

As a matter of fact, excluding the influence of a stronger yuan, on the whole, the cost of China's manufacturing industry and the export price are declining. In other words, the price of Chinese exports remains static when the calculation is done in local currency, because it is the appreciation of the renminbi that pushes up commodity prices in dollar terms. At present, the growth of the consumer price index in China is totally the result of the price increase in foodstuff, but this will not affect export prices. From this perspective, if China begins to appreciate its currency because of U.S. pressure, it is the Americans who will bear the high commodity prices and greater inflation pressure.

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