International economists are increasingly arguing that the Chinese economy poses a threat. US Secretary of the Treasury John Snow has called for the Chinese yuan to float freely. Although the Chinese government has rebuffed his call, if China's economy doesn't become gradually more deregulated, international pressure on Beijing will increase.
Be it Mexico or Southeast Asia, exports from developing countries are suffering because China grabs the orders thanks to its low labor costs. Japan and Taiwan are experiencing deflation due to their anemic economies which are a result of capital flowing towards China. The US and Europe must take action because they can no longer bear their growing trade deficits with China.
Even the IMF believes that pegging the yuan to the US dollar is causing the yuan to be seriously undervalued and that the situation must be improved. The US-based Center for Strategic and International Studies says the yuan is undervalued by 40 percent and this is the reason why the international community feels that China is guilty of unfair competition.
Calls for Beijing to revalue its currency have been heard for quite a while. Speculative hot money has already flooded into China to profit from the exchange rate differentials following a revaluation of the yuan.
Perhaps China's leadership also understands that following the nation's accession to the WTO, it will be hard to resist the international community's expectations on economic liberalization and international economic pressures for changes. China, however, is afraid to rashly adopt flexible economic measures due to a series of internal factors including the development gap between coastal and interior areas, rising unemployment rates, the maintenance of its foreign trade competitiveness, a 7 percent annual economic growth rate and nationalism.
In order to stabilize the yuan exchange rate, it's estimated that the Chinese government is purchasing about US$600 million daily. In the first half of this year, China's money supply was increased by 387.6 billion yuan to stabilize the exchange rate. The large money supply and rapid economic growth is rapidly creating a "bubble economy" and boosts international speculators' expectations on a revaluation of the yuan.
Beijing may be able to withstand the pressures in the short term, but in the mid and long term, the yuan may become the center of another major Asian financial crisis. To avoid too much pressure on the yuan, China would do best to slowly and flexibly adjust its policies, thus resolving international pressure and increasing the domestic ability to adapt.
Taiwan and China maintain an interesting symbiotic relationship in their economic development. It has been an established model that Taiwan takes orders and China manufactures and exports. Given this, Taiwanese manufacturers would continue to take advantage of China's relatively cheaper resources if the yuan remains the same. If the yuan appreciates, however, some Taiwanese businesses may move part of their production lines back home, thus changing the proportion in the division of work between the two countries. Then the percentage of products directly exported from Taiwan to the US would increase, indicating that Taiwan is no longer dependent on China's market. Such a development would be positive for Taiwan.
Many China-based Taiwanese businesses may also suffer from a revaluation of the yuan as they might lose orders. Therefore, the government should warn Taiwanese businesspeople about the risks of investing in China, and prepare and plan for future changes. Precautions must be taken to prevent any impact caused by the yuan's fluctuations.
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