From Overseas Press

Not by a stronger yuan alone

(The Straits Times)
Updated: 2010-07-08 10:33

It is unsurprising a stronger yuan will force Asian firms to move their labour-intensive export industries from China to lower-wage countries. What is less well recognised is that the resulting structural change will benefit both China and others. These companies can remain competitive in world markets. Such nations as Bangladesh, India and Vietnam stand to gain investments they will make. Their workers will have more job opportunities. Chinese enterprises can and have to move up the production value chain and afford to pay their employees more. This is the only way to sustain growth as labour becomes less and less cheap.

Consumers in industrialised countries need not have to pay higher prices for the myriad goods they have been buying from China but can now import from other sources as inexpensively. The irony is, even though their China trade deficit might decline, the United States and Europe cannot rely on the yuan revaluation alone to reduce their overall trade imbalance. They must export more to the world, not just consume less from China. The yuan has only limited impact on the strength and duration of their current nascent recovery.

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In China, recent workers' demonstrations for higher wages occurred before the decision last month to allow the yuan to float within a tight range. It makes more sense to let the currency appreciate in a controlled and gradual manner, reining in inflation at the same time, than to react episodically to strikes and other forms of labour unrest that might spill over as political strife. China has made a virtue of the need for a stronger yuan both domestically and in its relations with the US. It takes some of the wind out of protectionist sails the US Congress is ready to unfurl in the form of countervailing duties against Chinese imports. At the same time, it enables China to show that it is living up to its responsibility for global growth and the stability of the international economic and financial systems. Redressing the imbalance also reduces the liquidity flood of recycled dollars from the Chinese surplus, that had combined with American borrowing and consumption profligacy to cause the 2008 financial crisis. That has remained too big a risk.

Currency revaluation has not stunted growth in other countries. It will not do so in China. In the end, however, revaluation cannot be a panacea. To maximise benefits, China must replace foreign demand with higher domestic consumption, implement a social safety net to reassure people they need not save as much as previously, and divest the state's stake in the economy - as well as leave the low-wage approach to less developed nations.