Last year, China's total trade US$1.15 trillion, making it a major trading country following only the US and Germany. However, after the Chinese currency's exchange rate for the US dollar depreciated from 1.53 in 1980 to 8.3 in 1994, the Chinese government has adopted a policy of pegging the US dollar.
The extremely undervalued yuan has indeed become a magic wand for China in the export competition. In the fifteen years between 1990 and last year, China has cleaned out the global productive capital of many countries, primarily Taiwan. China was turned into the manufacturing site of the world, taking over the global market with its cheap goods. Last year, China's export surplus to the US reached US$144.7 bllion by November. In comparison with the 77.8 billion in 2000, the figure has doubled in four short years.
Therefore, if demands are made for the appreciation of other Asian currencies only, while yuan and Hong Kong dollar are allowed to be pegged to the US dollar, then the depreciation of the US dollar is the equivalent of the depreciation of the yuan and Hong Kong dollar. As a result, more productive capitals of Asian countries will be transferred to China, strengthening the size and the function of China's role as the "factory" of the world. This will be of absolutely no help to the deficit problems of the US.
In fact, it will aggravate the problem. Because the prices of products made in China are cheaper than those manufactured in other Asian countries, the amount of Chinese goods imported to the US will only increase.
Therefore, the European Central Bank should first identify where the source of the problem is. It must realize the magnetism of China and first ask for appreciation of the yuan, rather than blindly ask for appreciation of other Asian currencies, in order to effectively deal with the problem of the global trade imbalance.
In addition, from the standpoint of Taiwan, people must realize that even if Asian currencies appreciate as a result of US and European pressure, the NT can definitely not do the same.
As a result of erroneous policies during this past decade, Taiwan has been incorporated into what the unification camp refers to as the "Greater China economic zone." Currently, the productive capital of Taiwan is rapidly flowing toward China at the rate of 3 to 4 percent of GDP each year (the figure for Japan is 0.05 percent, the US 0.03 percent). As much as 86 percent of the overseas investments made by Taiwanese are in China. The major momentum for this capital movement is the extremely low exchange rate of the yuan.
If Taiwan's government and Central Bank do not face this problem with a more cautious mindset, and follow the market trend in allowing the NT dollar to appreciate along with other Asian currencies, then movement of Taiwanese capital to China will speed up at a rate much faster than the movement of Japanese, Korea and other Asian countries.
The expansion of investments in China by Taiwanese businesses will crowd out domestic investments, further stifling the economic growth of Taiwan which may further put an end to the long-awaited economic revival.
Perhaps, prompted by their ideologies, many academics and officials in Taiwan continue to feel positive about the appreciation of the NT dollar.