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.
Photo: REUTERS
“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.
Despite claims that China has dragged its heels on exchange rate reforms, Tao said Beijing had taken other less obvious steps to curb its ballooning trade surplus.
Official moves this year to hike minimum wages across the country will increase the cost of production and, eventually, help curb overseas shipments of Chinese products and boost demand for imports, Tao said.
“It will achieve the same purpose as revaluing the exchange rate,” he said.
ISSUES: Gogoro has been struggling with ballooning losses and was recently embroiled in alleged subsidy fraud, using Chinese-made components instead of locally made parts Gogoro Inc (睿能創意), the nation’s biggest electric scooter maker, yesterday said that its chairman and CEO Horace Luke (陸學森) has resigned amid chronic losses and probes into the company’s alleged involvement in subsidy fraud. The board of directors nominated Reuntex Group (潤泰集團) general counsel Tamon Tseng (曾夢達) as the company’s new chairman, Gogoro said in a statement. Ruentex is Gogoro’s biggest stakeholder. Gogoro Taiwan general manager Henry Chiang (姜家煒) is to serve as acting CEO during the interim period, the statement said. Luke’s departure came as a bombshell yesterday. As a company founder, he has played a key role in pushing for the
China has claimed a breakthrough in developing homegrown chipmaking equipment, an important step in overcoming US sanctions designed to thwart Beijing’s semiconductor goals. State-linked organizations are advised to use a new laser-based immersion lithography machine with a resolution of 65 nanometers or better, the Chinese Ministry of Industry and Information Technology (MIIT) said in an announcement this month. Although the note does not specify the supplier, the spec marks a significant step up from the previous most advanced indigenous equipment — developed by Shanghai Micro Electronics Equipment Group Co (SMEE, 上海微電子) — which stood at about 90 nanometers. MIIT’s claimed advances last
CROSS-STRAIT TENSIONS: The US company could switch orders from TSMC to alternative suppliers, but that would lower chip quality, CEO Jensen Huang said Nvidia Corp CEO Jensen Huang (黃仁勳), whose products have become the hottest commodity in the technology world, on Wednesday said that the scramble for a limited amount of supply has frustrated some customers and raised tensions. “The demand on it is so great, and everyone wants to be first and everyone wants to be most,” he told the audience at a Goldman Sachs Group Inc technology conference in San Francisco. “We probably have more emotional customers today. Deservedly so. It’s tense. We’re trying to do the best we can.” Huang’s company is experiencing strong demand for its latest generation of chips, called
GLOBAL ECONOMY: Policymakers have a choice of a small 25 basis-point cut or a bold cut of 50 basis points, which would help the labor market, but might reignite inflation The US Federal Reserve is gearing up to announce its first interest rate cut in more than four years on Wednesday, with policymakers expected to debate how big a move to make less than two months before the US presidential election. Senior officials at the US central bank including Fed Chairman Jerome Powell have in recent weeks indicated that a rate cut is coming this month, as inflation eases toward the bank’s long-term target of two percent, and the labor market continues to cool. The Fed, which has a dual mandate from the US Congress to act independently to ensure