The Sino-US currency crisis has ascended to another level.
On the 24th of March 2010, Harvard university and historian Niall Ferguson called on the Treasury to label the Yuan and other Asian currencies as currency manipulators. Most open economic sources, notably the Economist's "Big Mac" index, indicated that the Yuan was indeed - undeniably - undervalued, pretty much contradicting President Hu's opinion last week. While there is plenty of evidence to confirm that the Yuan IS indeed undervalued, U.S. Treasury Secretary Geithner has today curiously delayed publishing of the currency report which many had speculated the U.S. would brand China as a currency manipulator --- surprise, surprise? ..so what the hell is going on?
Asking several questions would probably clear things up:
--- Is the Yuan really undervalued? ---
(This is a pretty certain yes)
--- Did the Chinese manipulate the Yuan? ---
(Not that obvious - certainly China's cheap labour has contributed to China's trade surplus by creating very cheap exports - but capital restrictions imposed by the Chinese government do create a lot of distortions which would depress the Yuan. So to a certain extent yes. )
--- If the Chinese did manipulate the Yuan, to what extent is it "the Chinese reaping the fruits of the Americans"? ---
(The mainstream thought is that the Chinese had artificially suppressed the Yuan so that Chinese exports to the U.S. will be cheaper (hence more) and imported goods to China from the U.S. will be more expensive (hence less) - creating more real income for the Chinese at the U.S.'s expense, as well as the trade surplus-deficit parity between China and the U.S. .
However, there are at least 3 main factors that we should probably take into account before jumping to this conclusion.
Firstly, although the U.S. does import a huge amount from China, China is essentially in lack of raw materials which in turn, in order to fund its own production, China has to import raw materials from the U.S.; hence, increasing the value of the Yuan does not necessarily benefit China's exports as much as it is commonly perceived -- net trade values are often ignored in such calculations. Also, the U.S. trade deficit had long existed before the Yuan was considered as an undervalued currency - so an undervalued Yuan is perhaps not quite as significant for the U.S. economy as the U.S. right-wing media has portrayed it to be.
Secondly, China currently has overtaken Japan as the biggest buyer of U.S. Treasuries - its enormous foreign reserves is one of the reasons why the Yuan is currently so undervalued. Even though China is in the process of replacing U.S. gilts with gold reserves, the easiest way to inflate the Yuan would be for China to sell its U.S. Treasuries. Surely appreciation of the Yuan would not be so good for the U.S. economy...not when the yields of U.S. gilts sky-rocket and investors are "crowded" with high interest rates.
Thirdly, perhaps a minor point - but many of U.S. supermarts, Walmart, Carrefour, etc. have been vocally against Yuan appreciation as it would lead to an inevitable increase in its input costs. Undeniably, U.S. customers are indeed benefiting from a greater choice of goods as cheap Chinese exports provide them with cheaper necessities (despite questionable quality); there are always two sides of a coin when it comes to currencies. But it's probably true that you can't blame governments and big businesses for not taking consumer welfare into account - as usual.
Maybe, a fourth point: even if China was depressing its currency in order to boost its exports, it will necessarily create a negative externality somewhere else - and we all know inflation can bring about very deadly consequences. China's inflation rate can perhaps guide us as to how seriously undervalued the Yuan is. In my opinion, there is perhaps too much anxiety to pressure the Chinese government to appreciate the Yuan - as soon as their inflation rate shows signs of going through the roof, it will then become necessary and automatic for the Chinese to revalue the Yuan. )
Of course, all of this is history in the making - never in the annals of economics has a still pretty much state-controlled economy had such a inter-dependent love-hate relationship with such a free-market economy - not even between the USSR and U.S.A during the Cold War... whatever the outcome will be, it will surely be one that we cannot afford to ignore.
