A sharp revaluation in the yuan would trigger mass factory closures and job losses in China, analysts say, backing up the Chinese government’s strident defense of its controversial exchange rate policy.
Chinese Premier Wen Jiabao (溫家寶) told European leaders last week that the 20 percent to 40 percent appreciation demanded by critics would destroy Chinese firms and lead to social upheaval by triggering widespread unemployment.
The premier’s claims have merit, experts say, warning that any dramatic shift in the value of the yuan would be harmful not only to export-driven China, but also to a global economy struggling to recover from the financial crisis.
“If suddenly or within a few months China’s renminbi is revalued by such an amount, most companies in the export sector will be out of business,” said Lu Ting (陸挺), a Hong Kong-based economist for Bank of America Merrill Lynch. “It does not make sense for any country to have a very big one-off revaluation in such a short time unless they are in a really big mess.”
China appeared to bow to international pressure for a stronger currency in June, promising to let the yuan trade more freely against the dollar while ruling out any large market fluctuations.
Since then, the yuan has only gained around 2 percent against the greenback, angering US and European policymakers who say the yuan is undervalued by as much as 40 percent, giving Chinese exporters an unfair edge.
Ian Sloan, an economics fellow at the Massachusetts Institute of Technology, stressed that the legitimacy of China’s communist rulers rests on guaranteeing rapid economic growth year after year.
A sudden change in the yuan’s value could set off “a chain reaction of factory closures and layoffs across the interconnected networks that drive China’s export-oriented economy,” he wrote in a blog post.
“In the short term, China might be able to manipulate legislation, the banking sector and welfare levers to prop up key industries or regions, but in the long term, it is uncertain if these steps would be enough to preserve social -stability or continued loyalty to the [Chinese] Communist Party,” he said.
Lu said he supported calls by US and European policymakers for further reform of the exchange rate regime, but that their current demands went too far.
The US House of Representatives last month passed a bill inviting the US government to consider Beijing’s currency policy as an improper trade subsidy, allowing the Department of Commerce to slap retaliatory tariffs on Chinese goods.
“It is wise for US politicians to impose some pressure on China, but to ask for something that is not practical or even harmful is not good,” Lu said.
Hong Kong-based Credit Suisse economist Tao Dong (陶冬) said: “I think a rapid currency appreciation would probably do damage to the Chinese export sector, which typically is a low-margin business.”
China’s trade surplus shrank to US$20.03 billion in August as imports accelerated, growing a larger-than-expected 35.2 percent year-on-year, while exports growth slowed to 34.4 percent. Wen’s remarks come amid fears of a global currency war after several countries including Japan intervened in recent weeks to prevent their currencies rising to levels that would endanger their exports.
“Everyone is guilty — it’s not just the Chinese,” Tao said.