Mon, Jan 17, 2005 - Page 11 News List

More to China than its cheap currency

ROCK-BOTTOM COSTS Even a large revaluation of the yuan as a corrective to China's trading imbalance with the US might not have the impact lobbyists want


Workers in a factory in Guangzhou, in southern China, make hospital gowns and other products. Wages of US$1 an hour help make China a giant in world trade.


Nearly the size of an old station wagon, a bright orange machine here mashes plastic pellets into rows of 6-inch-long blue clips for hospitals across the US. Pan Guotao, a 29-year-old worker from a village in northern China, sits on a plastic stool next to the machine and wields a straight razor to slice apart the clips, which are used to hold ice packs in plastic sleeves.

It looks like a simple operation, but it lies at the heart of the US trade deficit with China.

The Bush administration and many private economists have urged that the authorities in Beijing allow China's currency, the yuan, to rise in value against the dollar. They want the Chinese to stop buying up US dollars in large amounts and issuing more and more yuan to hold down the value of the currency.

But many Chinese and foreign executives in China say that a revaluation of the yuan, whose exchange value is linked to the dollar, is unlikely to be a silver bullet for dealing with the US deficit. Costs here are so low, they say, that a revaluation is unlikely to narrow the deficit appreciably, and might even increase it.

China's edge in exports these days goes far beyond the low wages of Pan, who earns US$1 an hour, plus free room and board. Her employer, Charles Hubbs, who owns the plastics factory, calculates that the rent for his operation here, built by workers earning even less than Pan, is a quarter of what it would be in a city like Houston. Perhaps more important, China has learned to build factories and many kinds of equipment at a fraction of the cost in Western countries.

The big orange plastic injection molding machine costs US$18,000 here, compared with as much as US$60,000 for US models; the Chinese-made machine breaks down a little more often, but it can be quickly fixed because the assembly plant is less than two miles away. The costliest part, the specially hardened and shaped molds in which the clips are formed, cost less than US$8,000, against US$70,000 in the US.

Such savings leave Hubbs feeling well insulated from even a big shift in the value of the yuan, which trades around 8.28 to the dollar.

"With the currency where it is today," he said, "we can save 30 percent over our competition in the Caribbean easily."

Making the yuan more expensive against the dollar would mean that US exporters to China, like Boeing, could sell more goods. Importers like Wal-Mart would have to pay more for the toys, clothes and other goods they buy. That would give Wal-Mart and others an incentive to import from other nations, perhaps even US suppliers.

Revaluation not a cure

Yet executives in many industries say that China's competitive advantages are so great that even the largest increase in the yuan that Beijing might approve this year, perhaps 10 percent, would not significantly cut into the US trade deficit with China. Indeed, revaluation is likely to increase the deficit for months and perhaps years to come, by immediately driving up the already considerable cost of what the US imports from China.

A stronger yuan would give a boost to US companies exporting to China because their goods would become cheaper here. But the US currently buys nearly five times as much from China as China does from the US. So the gains from a rise in a smaller amount of exports are likely to be overwhelmed by the higher cost of the larger amount of imports.

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