US$124 billion is quite a lot of money. Astronomical even. But that was China's trade surplus with the US last year, and the figure is still growing. China's foreign reserves are also accumulating quickly, and reached US$514.4 billion in September.
There has been pressure on the yuan to appreciate, and US Secretary of the Treasury John Snow publicly called for China to abolish its foreign exchange controls and allow full currency flexibility to the yuan. During his presidential campaign, Senator John Kerry went so far as to say that China was manipulating its exchange rate to maintain its international competitiveness. But China remained intransigent in the face of US pressure, fearing an upward valuation of the yuan will hurt exports.
While China remained steadfast, Taiwan's market got itself into a mess. The New Taiwan dollar has shot past NT$33 against the US dollar and is heading for the NT$32 mark. What do our officials and the public think of this? In local papers, domestic opinion praises this trend. Analysts are saying that a strong NT dollar will counterbalance increased prices for oil imports, alleviate the effects of imported inflation, draw foreign investment and bolster the stock market. On the other hand, they predict the impact on exports will be limited, and that the US dollar is likely to remain weak for some time.
Opinions of Taiwanese officials on a strong currency radically diverge from those of officials in China and the US. If Taiwan's officials are correct, then why should the Chinese fear a strengthening yuan? If a strong yuan will counterbalance increased oil prices, and if the effect on imports will be minimal, in addition to cooling down the currently overheated market, isn't this exactly the cure-all that China is looking for?
US officials could learn from Taiwan by abandoning the policy of keeping the US dollar weak, and adopting a policy that would strengthen the greenback. Demanding East Asian countries revalue their currencies upward to help the US solve its unemployment problem is not admirable. But if US and Chinese officials are right, then the Taiwanese position requires some consideration.
Ironically, academics who regard a strengthening NT dollar with such optimism are the same ones who are supportive of China's policy of resisting appreciation at all costs. They often cite foreign experts in saying that the yuan's appreciation would reduce direct foreign investment, and hinder economic growth in China; this in turn would be detrimental to East Asian and the world economies. So a strong currency in Taiwan is good, but in China it is not.
Despite major downward fluctuations of the NT dollar in the 1950s, the yuan during the 1980s and the US dollar toward the end of the 1980s, things worked out. Yet, upward valuation of a currency, such as when the NT dollar rose from NT$40 to NT$26 against the US dollar in the 1980s, brought great suffering. The Central European Bank repeatedly maintains that a strengthening euro will hurt economic development in Europe. Only Taiwan is optimistic about this development. Amid this uncertainty over exchange rates, it seems that China, with its policy of "changing nothing," may be the only winner.
US President George W. Bush has said nothing about this issue. Already, currencies in Asia are beginning to appreciate, while the yuan depreciates. Taiwanese investment in China is likely to increase as a result, and China will take further steps toward becoming the factory of the world. The people who suffer most as a result of all of this will be Taiwan's unemployed workers.