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China is letting its currency escalate faster against the dollar to contain inflation from its commodity imports. A strengthened yuan helps stabilize the trade deficit between the U.S. and China. Not only does this make U.S. exports more competitive with Chinese goods in their home market, but because the yuan is not similarly rising against the euro or the yen, it also gives American exports an edge against those from the European Union and Japan. U.S. machinery, chemicals, IT equipment and components, semiconductors, medical and scientific equipment, meat and grains will benefit the most.
Those U.S. exports will join already booming sales for environmental equipment. Beijing remains determined to clamp down on pollution that has become a major public health threat -- and a looming embarrassment to the Summer Olympics. Goods ranging from scrubbers for manufacturing facilities to greener car parts and from water and wastewater treatment equipment to alternative power generation infrastructure are in high demand.
A combination of environmental concerns and the weak dollar is also enlarging China's appetite for waste and scrap. Chinese manufacturers are looking to save money on expensive, dollar-denominated commodities by recycling everything from old copper piping to obsolete cell phones' circuitry.
But the stronger yuan carries a price: higher U.S. inflation. Allowing the yuan to appreciate against the dollar isn't eliminating China's inflation so much as exporting it. Add to that the price increases that Chinese manufacturers are slapping onto their goods to cover higher wages and costlier materials, and the result will be a significant bump up in the price that the U.S. consumers pay for Chinese goods at big retail chains.
U.S. manufacturers looking to hold costs down by sourcing elsewhere won't find much immediate relief. The most feasible alternate destinations have problems of their own. Moving production inland, away from China’s coastal cities, would help hold wages down but also contribute to transportation costs. The countries that are most frequently touted as lower cost alternatives to China are themselves facing inflation problems. Many of these are already allowing their currencies to appreciate faster. The Malaysian ringgit, for example, rose 5.5% against the dollar since the start of 2008, compared to the yuan's 4.4% appreciation over the same period.
Look for the U.S.-China trade gap in 2008 to total just under 2007's record $256 billion, though it will make up a larger share of the deficit -- a whopping 42%, compared to last year's 36% -- as the total gap narrows sharply. The last time the U.S.-China deficit dipped was 2001.
And it's likely to shrink further in 2009, thanks to adjustments to the exchange rate both this and last year. Price shifts tend to lag currency shifts by 18 months. By the end of 2008, the yuan will trade at somewhere between 18% to 20% higher against the dollar than it did before Beijing lifted the peg in July 2005. Next year, it will strengthen to at least 27.5% above the old peg, the level many members of Congress as well as the business community have long considered its fair market value.
U.S. political and business leaders have harangued China for years to allow the yuan to appreciate faster against the dollar, arguing that keeping the yuan artificially cheap amounted to an illegal export subsidy. China's standard response has been that it recognized the need to let the yuan appreciate but that it would do so on its own terms -- gradually, as to not stifle the country's economic growth and put export jobs at risk. What has changed is that Beijing now views inflation as a bigger threat to China's economy than slower growth.
That's proving the case not only in China, but also in Taiwan and much of Southeast Asia as well. "The only reason China and other Asian nations have been able to get away with maintaining these weak levels for their currency [for so long] has been remarkably low levels of inflation," says Michael Woolfolk, senior currency strategist with the Bank of New York. But the longer they let their own currencies drop in tandem with the dollar, the higher the prices they pay for dollar-denominated imports, such as food and fuel.
Letting their currencies appreciate faster won't halt inflation in these countries, but it can keep the problem at levels tolerable to their citizens. That's a major concern in the region, particularly for China, where popular anger over high food inflation in 1989 culminated in the Tiananmen Square protests.
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POSTED BY: Mark (April 29, 2008 11:24 AM)
Instead of writing stories... the writer should interview the multinational companies like Intel, Black & Decker, IBM, etc. what are the + and - impacts for them with the yuan appreciation. I see the yuan's appreciation putting lots of costs and inflationary pressures on foreign companies that have their manufacturing base in China.
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