But yen appreciation didn't cause the trade surplus between the U.S. and
Japan to diminish. Instead, expectations of an ever-higher yen caused bubbles in
Japanese stock and asset markets, destabilized the Japanese financial system and
threw the country into a decade-long deflationary slump and zero-interest rate
trap in the 1990s, McKinnon said.
Canada, the U.S.' largest trading partner, is another example, BBH's Chandler
noted. "The Canadian dollar has appreciated markedly in recent years, but the
U.S trade deficit with Canada is bigger today than it was a year ago or five
years ago," he said.
Backfire?
Some analysts warned that a sharp and sudden move of the yuan/dollar exchange
rate may pose risks for the U.S. economy.
A rise in the yuan would reduce China's appetite for U.S. treasury bonds,
leading to a rise in U.S. interest rates, said MG Financial's Laidi. Chinese
investors held $262.6 billion in U.S. Treasurys in January, according to the
Treasury Department.
"That would really hurt the U.S. housing market, which is already slowing,"
Laidi said. "It would hurt the U.S. economy and would hurt the rest of the
world's economies."
Brian Dolan, head of currency research at Gain Capital, cautioned that a
sharp appreciation of the yuan would import significant inflationary pressure
into the U.S. economy.
But BBH's Chandler said any substantial inflationary risk would be minimal.
Instead, he foresees that if the yuan were to float in the open market, the
greater risk lies in the possibility that speculative money betting on yuan
appreciation would flow out and look for another play. Meanwhile, corporations
would also find it easier to repatriate profits and the rising middle class in
China, like their counterparts in other developing countries, would likely put
some of their savings off-shore.
Therefore, "letting the renminbi float
with open capital markets could very well see the renminbi fall," Chandler said.
Manipulator?
Over the weekend, the European Union and Asian finance ministers said at a
meeting in Vienna that China's currency regime should become more flexible.
Their comments followed a statement from U.S. Treasury Undersecretary Timothy
Adams on Friday, who said China has been "far too cautious" and should act "now"
to allow greater flexibility in the value of the yuan. He didn't say if the U.S.
would accuse China of manipulating its currency in a report due from Treasury
this spring.
A number of lawmakers have introduced bills that would punish China unless it
moves toward a free-floating currency. Sens. Lindsey Graham, R-S.C., and Charles
Schumer, D-N.Y., agreed to postpone a vote on the most high-profile bill after a
recent visit to China.
MG Financial's Laidi said the U.S. threat to name China as a currency
manipulator is "unfounded."
"China is not engaging in manipulation. It's
allowing the currency to appreciate, by 1% since the revaluation," he said.
"Many countries have some sort of arrangement in their own currency against the
U.S. dollar. But the U.S. does make noise about China because China has the
highest currency reserves in the world."
BBH's Chandler said over the past months, China has taken many steps, such as
introducing a market-maker system, to build the institutional capability and
mechanisms that allow for a more flexible currency.
"How can a peg-which is no longer a peg, be considered manipulation? The
renminbi was pegged to the U.S. dollar when the dollar was strong in the second
half of the 1990s and when the dollar was weak as in the last half decade,"
Chandler said.
But Gain Capital's Dolan said there's little possibility of that happening.
"The election pressure is building, so there is more domestic pressure to
name China as a currency manipulator," said Dolan. But "it'd be huge diplomatic
slap in the face. I think they'll [Treasury] find a way to avoid doing that to
keep the diplomatic situation on an even keel."
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