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Why China doesn’t want to revalue the yuan

Submitted by on May 25, 2010 – 11:07 amNo Comment

Recently just before the G20 summit, China’s currency problem became the hot topic when America’s treasury secretary, Tim Geithner received a letter from 130 congressmen asking for immediate action to force China to revalue the yuan.

But Mr. Fu Ziying, China’s vice minister of commerce announced that China would not compromise to the pressure from other countries. He argued the reform of exchange system should be determined by China’s own economic situation.

The US government has been urging Chinese treasury policymakers to raise the yuan since 2008, when yuan was pegged to dollar. Most American officials and scholars argue that China has favored its exports by manipulating the currency.

They say  renmimbi (RMB) is kept at an artificially low rate which has caused the US to suffer a serious trade deficit with China for years.

Certainly the fundamental reason why the Chinese policymakers insist on  maintaining a stable currency is that raising currency would cause exports to decrease. As export trade is the most significant impulse for China’s GDP growth, and a stronger yuan will slow down the economy growth.

According to Chinese import and export trade directory, if the yuan rises 3 percent in a short term, most Chinese exporting factories would lose up to 50 percent profits. Consequently, lots of factories would have no choice but shut down, which means millions of workers would lose their jobs.

China has become the biggest creditor nation of the United States overtaking Japan in September 2008.  At the end of 2009, China owned $US894.8 billion of government bonds, which means China would give North America 44.74 billion dollars for free if the yuan increases 5 percent.

Japan’s former experience has also scared China off revaluing its yuan.

In 1984, the US forced Japan to sign the ‘Plaza Accord’ in order to resolve the trade deficit between the two countries caused by overvalued dollars. After this ,  the yen rose, followed by excess liquidity and inflation, and finally resulting in Japan’s ‘lost decade’ of economic collapse.

China’s decision makers are afraid Japan’s past would become the future of China. And what their concerns make sense. According to Li Jijun, an economics lecturer of Northwest University in Xi’an, China, a potential crash could come from unrestrained property development.

“Currently the international society assumes that the yuan is undervalued about 10 to 20 percent,” he said.  “If the government agrees to let the currency fluctuate freely, a profitable yuan might attract more hot money to flow into China, which would cause a serious property bubble.”

Since the country is in the process of rapid economic transformation, a permissive currency policy might have serious results including dragging the whole economy into a downward trend. There is no doubt that a stable yuan is more beneficial to China’s stability and growth.

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