The Hot Zone
China's newly announced air defense identification zone over the East China Sea aims to shore up national security
Current Issue
· Table of Contents
· Editor's Desk
· Previous Issues
· Subscribe to Mag
Subscribe Now >>
Expert's View
Market Watch
North American Report
Government Documents
Expat's Eye
Photo Gallery
Reader's Service
Learning with
'Beijing Review'
E-mail us
RSS Feeds
PDF Edition
Reader's Letters
Make Beijing Review your homepage
Hot Links

cheap eyeglasses
Market Avenue

Economic & Trade Relations
Special> Sino-U.S. Economic & Trade Relations> Economic & Trade Relations
UPDATED: December 21, 2007 NO.52 DEC.27, 2007
Whither the Dollar
The fall of the U.S. dollar hit new lows in December. That’s not good news for the world economy

The depreciation of the U.S. dollar is not big news, but its new low record is. In December, the greenback fell to its lowest rate in the last 30 years against other major currencies. The dollar slumped to 7.3589 per the Chinese yuan on December 14, the lowest point since it started depreciating in 2002. The Chinese Government had pegged the value of the yuan to the U.S. dollar until July 2005, when it adopted a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.

With the value of the U.S. dollar dropping 24 percent during the last five years, economic experts said they expect the greenback to continue to weaken. The dollar's depreciation has already influenced the world's largest economies, including China. As the biggest developing country whose export volume is a major driver of its economy growth, China may be one of the major victims of the fall of the U.S. dollar, the experts said.

It isn't easy being green

The fall of the U.S. dollar has affected economic zones from west to east. "It has destabilized economies throughout the world," said Zhen Bingxi, a senior research fellow at the World Economy Division of the China Institute of International Studies (CIIS).

The eurozone has taken the biggest hit. Since 2002, the euro has risen 40 percent against the U.S. dollar. The euro's appreciation has caused a decrease in the EU's exports, although the eurozone's economy has not been affected to a great degree, Zhen said. The EU has softened the blow by adjusting the structure of its industry system and encouraging its citizens to consume more products instead of exporting them. The domestic demand inside the EU has partially replaced the bloc's reliance on foreign trade.

"On some level, the adjustments had made up for the disadvantages caused by the U.S. dollar's depreciation," Zhen said. The EU's domestic demand for goods has expanded in recent years, giving its economies a boost. According to the International Monetary Fund, the EU's economic growth rate is expected to reach 2.5 percent this year. That would be the highest growth rate among the EU, Japan and the United States.

The Organization of the Petroleum Exporting Countries (OPEC), which settles its accounts for oil exports mainly with U.S. dollars, is in a quandary. When the U.S. dollar depreciates, OPEC members raise the price of oil to lessen the losses brought by the currency's depreciation, Zhen said. But when world oil prices rise dramatically, they see bigger losses due to the depreciation of the U.S. dollar. This prompts importers to pay much more for their oil purchases, a move that also slows down world economic growth.

The U.S. dollar's depreciation also has triggered disagreements inside OPEC. To reduce their risk, some OPEC members started converting the U.S. dollars they received from oil exports into euros. Other OPEC members opposed abandoning the U.S. currency, arguing that it would aggravate their dollar depreciation risk and create an even worse situation. Changing some of their U.S. dollars into euros is one way to lessen the risk, Zhen said, but he added that underselling the U.S. dollar would be a wise move to avoid a bounce-back of an unstable dollar exchange rate. Overall, the greenback is not a very popular currency at this stage, he added.

For Asian countries like China, whose economic growth relies heavily on exports, the greenback's fall has come as a blow. The Japanese yen and South Korean won also have been appreciating steadily in recent years.

The Chinese yuan has appreciated 12 percent to the U.S. dollar since July 21, 2005. The change has a negative impact on both China's export volume and its economic growth, said Zhen.

Zhou Shijian, Standing Councilor of the China Association of American Studies, said China's export volume has decreased annually since 2004 due to the U.S. currency's depreciation, because export transactions are settled in U.S. dollars. China's overall export growth rate was 35.4 percent in 2004, 28.4 percent in 2005, and 27.2 percent in 2006. It is expected that China's export growth rate will reach 25 percent this year, Zhou said.

"It is obvious that the U.S. dollar's depreciation has bashed China's economic growth," he said.

China's small and medium-sized enterprises are feeling the most pain from this situation. Their overall costs and salaries for employees are rising, but their profits are narrowing, Zhou said. Unlike big companies, they are not strong enough to resist the storm. In Guangdong Province, for example, more than 1,000 shoe factories that depend mainly on exports have already gone bankrupt. Companies and enterprises with overseas businesses, especially those in coastal areas, have been hit even harder, he said.

Deep in the red

Both experts believe that the U.S. dollar's depreciation will not end very soon and that it actually benefits the U.S. economy. Since the greenback's value started dropping in 2002, the United States has kept increasing its exports, while its employment rate has been rising.

"In this regard, the United States hopes that currencies in other regions continue to appreciate, and the U.S. dollar is the only currency to depreciate," Zhou said.

Zhen from the CIIS cited another reason. He pointed out that according to the Peterson Institute for International Economics in Washington, the U.S. dollar's value rose about 40 percent between 1995 and 2001, and that the increase has been one of the causes of the U.S. trade deficit during the past years.

Zhen also said the U.S. "double deficit"-the trade deficit and the budget deficit-triggered the dollar's depreciation. He predicted that a further currency slump could ensue, because the current depreciation rate is only 24 percent of what it was in 2002. The U.S. dollar's decline will continue for at least two more years, he added.

The falling U.S. dollar will not drag down the economy of the EU, the biggest economic community in the world, Zhen said. After the EU adjusts the structure of its industry system, it will see a relatively steady increase in its economic growth, he said.

In the meantime, the gross domestic product (GDP) of the United States, which accounts for a quarter of global GDP, is rising. The country's economic growth can almost counteract the negative influences of decreased exports to other economic communities due to the U.S. dollar's depreciation, Zhen said. Given such circumstances, China must consider some ways to stabilize its own economy, he added.

China expects its GDP to grow 9 percent in 2008, Zhen said. "Foreign trade, investment and domestic demand are the troika that can drive a country's economy ahead," he said. He also noted that since foreign trade and investment can be affected by the U.S. dollar's depreciation, the best way to keep China's economy buoyant for now would be for the government to further adjust its economic structure and develop knowledge-based industries instead of labor-intensive ones. Moreover, the country needs to encourage its people to consume more products. To decrease its risk in the meantime, China could change some of its U.S. dollar reserves into other foreign currencies, Zhen said.

Both the United States and the EU have been pushing China to allow the yuan to appreciate. Because the U.S. dollar's depreciation has caused many countries and regions to switch their foreign exchange reserves to euros, the EU should make more efforts to maintain the euro as a stable hard currency. The EU must find another currency to do the job together, and it would appear that the yuan is the most suitable, Zhen said. In this regard, the EU has prompted China to quicken the pace of the yuan appreciation, Zhen said.

Yet, international economic experts believe a fast yuan appreciation would not bode well for China.

"The appreciation should be carried out step by step to avoid possible turbulence, because China's financing system is not perfect enough now," Zhen said.

But currency appreciation is natural for a country whose economy has grown very fast. When considering the country's long-term economic developments, the appreciation of the yuan will be more flexible and mature, Zhen said. It also will let China adjust its currency exchange rate according to its needs, he added.

The dim future for exports could also prompt Chinese enterprises to improve their technological levels and adjust their export structures by selling more knowledge-based products to other countries, thereby benefiting China's future development, Zhen said. For example, China has enacted regulations that remove tax rebates on products made with higher energy consumption or pollution elements.

In this way, China can also realize its sustainable development goals. The current imbalance of trade between China and the United States could also be improved, Zhen said, because a huge trade surplus is not good for China. The trade volume between China and the United States was $262.68 billion in 2006, and China's trade surplus was $144.26 billion, according to the country's Administration of Customs.

If the Chinese Government lets the yuan appreciate, it will maintain its rate within a controllable range, said Zhou of the China Association of American Studies. If a boost in the yuan's value started dragging down the country's economic development with, for example, China's export volume dropping to an unbearable point next year, then the government would definitely curb the rate of appreciation, he said.

Top Story
-Protecting Ocean Rights
-Partners in Defense
-Fighting HIV+'s Stigma
-HIV: Privacy VS. Protection
-Setting the Tone
Related Stories
-Foreign Trade in Retrospect
-U.S.: China Not Manipulating Currency
Most Popular
About BEIJINGREVIEW | About beijingreview.com | Rss Feeds | Contact us | Advertising | Subscribe & Service | Make Beijing Review your homepage
Copyright Beijing Review All right reserved