Taipei Times: Despite stepped-up international pressures and US tax-hike threats to force China into changing its currency policy, Beijing appears to be standing firm, not allowing the yuan to float. What is HSBC's view on this issue?
Tony Yang (楊錦裕): We should look at China's increasing trade surplus and US dollar reserves from two perspectives: foreign direct investments (FDIs) and surging foreign imports. As a result of globalization, multinationals are flowing in to take advantage of China's low labor costs in the format of FDIs, which contribute to nearly 55 percent of China's trade surplus here. Its increasing foreign reserves are, therefore, a result of a trade surplus brought by FDIs and a current account surplus, which has nothing to do with [the weakening of the] US greenback.
According to a world labor organization, the annual cost of Chi-nese labor averages at US$1,200 per head, which accounts for 2.2 percent of US labor costs, or 2.3 percent of Japan's labor cost. Cheap and well-educated labor is one of China's economic advantages, which other Asian countries can't compete with. Even if the Chinese yuan is to be appreciated, those job opportunities couldn't possibly return to the US as it wishes.
TT: Given China's cost advantages, the US-led economist camp still insists that Chinese-made products are not genuinely competitive. Do you agree with what they say -- that an under-valued yuan disadvantages US exporters?
Yang: No, I don't think so. US exporters are not directly competing with Chinese exporters. Most US businesses have outsourced to Asia to [rationalize their cost structures], be it to China or other Asian countries, which makes the US trade deficit inevitable. Besides, for the first half of this year, China imported 10 percent more than it exported, which we believed was expected to offset its trade surplus.
TT: What do you think China is doing to alleviate the pressure on its currency?
Yang: China has been doing a lot to decrease foreign reserves. First, it is considering formulating the qualified domestic institutional investors (QDII) mechanism to allow locals to invest in foreign markets. Second, there is unconfirmed news that China may officially adjust the refund of the averaged 15 percent export taxes, which is sure to add costs for exporters and helps retain the Chi-nese yuan. China also relaxed foreign currency controls, allowing locals to possess more US dollars before making foreign trips.
We believe China has prioritized a maintenance of its currency stability because it can't afford to have an unstable currency to impact its future economic growth amid potential crises of increasing unemployment and the collapse of the banking sector as a result of high non-performing loans and state-owned enterprise (SOE) reforms.
Therefore, we don't think that the yuan is likely to appreciate by the end of next year. But in the long run, the yuan is expected to conform to the market-based rate and be pegged to a basket of trade-weighted currencies instead of the US dollar.
TT: How has the yuan issue impacted Asian currencies especially after the Japanese yen, South Korean won and New Taiwan dollar reacted on the G7's call and slightly strength-ened weeks ago?
Yang: The G7 warned of a flexible policy in Asian currencies since most of them peg to the US dollar. We can't predict how the currency war will end but we certainly saw that each country adopted different monetary policies to resist international pressures. In the end, only market forces can decide.
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