China attended a G8 summit for the first time earlier this month. This not only indicates that the international community acknowledges China's achievements in economic development, but also implies that Beijing will have to shoulder more responsibilities for the world's economy. The appreciation of China's yuan might become its admission ticket into G8.
Because the yuan has been pegged to the US dollar at US$1 to 8.28 yuan and the dollar began to depreciate last year, the yuan has followed suit and devaluated against other currencies. The weighted exchange rates between the yuan and the currencies of Beijing's trading partners have slumped by 6.9 percent over the past 12 months.
The yuan's depreciation has caused serious trade disputes between China and member of the Organization for Economic Cooperation and Development (OECD). OECD members have blamed China for exporting deflation, creating massive trade deficits and intensifying unfair competition against their exports. They demanded that China act responsibly and appreciate its currency. On Feb. 22, Japanese Finance Minister Masajuro Shiokawa proposed at a meeting attended by the seven OECD countries that an agreement be passed to force the yuan to rise.
The US trade deficit with China last year topped US$100 billion. Voices inside the US asking for restrictions on China's imports have grown increasingly loud.
In Europe, the euro's exchange rate against the dollar climbed by 20 percent between late last year and the end of last month. The yuan also depreciated against the euro by 20 percent. China enjoyed a trade surplus of US$9.7 billion with the EU. During the first four months of this year, the value of China's exports to the EU jumped by 45 percent, leading to a surplus of US$4.3 billion.
The EU plans to raise tariffs on Chinese products from 3.5 percent to 5 percent. In the first half of next year, it might also cancel the generalized system of preferences that China now enjoys.
China's own balance of payments is placing great pressure on the yuan to appreciate. Last year, China's balance of payments on current accounts registered a surplus of US$35.4 billion and capital accounts registered a surplus of US$32.3 billion. Its net errors and omissions were US$7.8 billion. This is the first positive figure since 1989, which means that China's overseas capital has been flowing back through underground channels. This year, foreign direct investment in China is expected to reach US$60 billion. These surplus figures have created heavy pressure on the yuan to appreciate.
Its huge foreign currency reserves lead to a waste of resources. Due to the large surplus in its balance of payments, China's foreign currency reserves have increased rapidly, totaling US$316 billion by the end of last month, a figure larger than its total imports last year. Beijing has used most of its foreign currency reserves to purchase US government bonds. The investment return is very low. If China continues with the practice of rapidly accumulating its foreign currency reserves, a low return will be created from its massive resources.
Ronald McKinnon of Stanford University recently warned that if China allows the yuan to appreciate, it could well follow in Japan's footsteps and sink into the vicious circle of deflation over a decade. But, since a great majority of China's trade is in processing, its currency's appreciation will only have a very limited influence on deflation or the competitiveness of its exports.
The yuan's appreciation will lower the prices of China's im-ports. But since half of the imports are raw materials or intermediate goods for its export products, which will be processed before being exported, the rise of the yuan has little influence on domestic prices.
At the same time, the decreasing cost of its imports will offset the adverse influence on export competitiveness caused by the yuan's appreciation. Furthermore, China's economic growth is now speedy and vigorous, with a forecast growth rate of 7.5 percent for this year.
Therefore, a slight appreciation of the yuan will not go so far as to induce deflation.
China can let its currency float within a suitable range and peg it to the currencies of major trading nations (not just the US dollar), thereby helping the yuan to appreciate by, for example, 3 percent to 5 percent. This can resolve the abovementioned problems -- international trade disputes, pressure on its balance of payments and the low return on its foreign currency reserves.
Although the strengthening of the yuan will have some effect on deflation and export competitiveness, the impact will be extremely limited. These are all the responsibilities China must shoulder if it wishes to become an economic superpower.
Tung Chen-yuan is an associate research fellow at National Chengchi University's Institute of International Relations.
Translated by Jackie Lin
A series of strong earthquakes in Hualien County not only caused severe damage in Taiwan, but also revealed that China’s power has permeated everywhere. A Taiwanese woman posted on the Internet that she found clips of the earthquake — which were recorded by the security camera in her home — on the Chinese social media platform Xiaohongshu. It is spine-chilling that the problem might be because the security camera was manufactured in China. China has widely collected information, infringed upon public privacy and raised information security threats through various social media platforms, as well as telecommunication and security equipment. Several former TikTok employees revealed
For the incoming Administration of President-elect William Lai (賴清德), successfully deterring a Chinese Communist Party (CCP) attack or invasion of democratic Taiwan over his four-year term would be a clear victory. But it could also be a curse, because during those four years the CCP’s People’s Liberation Army (PLA) will grow far stronger. As such, increased vigilance in Washington and Taipei will be needed to ensure that already multiplying CCP threat trends don’t overwhelm Taiwan, the United States, and their democratic allies. One CCP attempt to overwhelm was announced on April 19, 2024, namely that the PLA had erred in combining major missions
The Constitutional Court on Tuesday last week held a debate over the constitutionality of the death penalty. The issue of the retention or abolition of the death penalty often involves the conceptual aspects of social values and even religious philosophies. As it is written in The Federalist Papers by Alexander Hamilton, James Madison and John Jay, the government’s policy is often a choice between the lesser of two evils or the greater of two goods, and it is impossible to be perfect. Today’s controversy over the retention or abolition of the death penalty can be viewed in the same way. UNACCEPTABLE Viewing the
At the same time as more than 30 military aircraft were detected near Taiwan — one of the highest daily incursions this year — with some flying as close as 37 nautical miles (69kms) from the northern city of Keelung, China announced a limited and selected relaxation of restrictions on Taiwanese agricultural exports and tourism, upon receiving a Chinese Nationalist Party (KMT) delegation led by KMT legislative caucus whip Fu Kun-chi (傅崑萁). This demonstrates the two-faced gimmick of China’s “united front” strategy. Despite the strongest earthquake to hit the nation in 25 years striking Hualien on April 3, which caused