Consensus for Continuance

On both sides of the Paci fi c, the heat in a protracted dispute over China’s currency renminbi, or yuan, is rising quickly. While the United States pushed for a sharper increase in the yuan’s value while threatening to slap duties on importing Chinese products, China cedes little ground on its currency policy. But before concerns turn into fullfl edged fears, it is worth asking what will happen if China strengthens its currency. In different media, economists and entrepreneurs from home and abroad provided answers. Edited excerpts follow∶

A Stronger Yuan Hurts Chinese Farmers

Joseph Stiglitz, a Nobel Prize-winning economist at Columbia University

The exchange rate adjustment, especially between the United States and China, would not help cut the U.S. trade de fi cit. One way of tackling the problem, however, is to loose restrictions on high-technology exports to China.

If the yuan is allowed to appreciate,China will have to pay less for imports and that means the international prices of some agricultural products like rice and wheat will go down. This is obviously harmful to Chinese farmers and may further exacerbate the problem of the widening urban-rural income gap in China.

So China should protect itself by making sure the exchange rate does not appreciate,otherwise it will have to provide subsidies to its farming population.

It is therefore necessary for China to maintain the yuan’s stability and at the same time pay attention to other risks, such as safety concerns of its foreign exchange reserves in U.S. dollar assets.

A Note of Caution

Robert Mundell, a Nobel Prizewinning economist at Columbia University

There is no problem with the yuan exchange rate. As a matter of fact, its stability could help the world economy out of the financial crisis. China’s currency pegging to the U.S. dollar is not manipulation, but a reasonable policy in line with its economic realities.

Appreciating the yuan will devastate the livelihood of poor people throughout China and take shine off its appeal to foreign investors. Worse still, as the euro’s experience illustrates, volatile exchange rates could stir up waves in global fi nancial waters and leave space for speculation.

Since the 1990s, the yuan has stayed relatively stable against the U.S. dollar,providing a stabilizing force for the world economy. Given the present size of China’s economy, the currency now plays an even larger role in global recovery efforts.

If the United States labels China as a“currency manipulator” and imposes restrictions on Chinese exports, there will be serious consequences for both sides.

Lose-Lose Situation

Stephen Roach, Chairman of Morgan Stanley Asia

A sharp upward revaluation of the yuan would lead to a disastrous outcome for the United States, and it would end up as a “loselose situation” for both Washington and Beijing.

The currency adjustment that is being suggested by the West is the wrong way to go. If China were to adjust its currency sharply, the Chinese share of the U.S. multilateral trade de fi cits would shift to another country, a higher cost producer, which would have the effect of imposing a tax on American workers that the politicians are in theory trying to protect.

It’s ironic that the United States blames China’s currency for its high unemployment rate and trade deficit. Trade sanctions on China would only produce disastrous results for the United States.

The U.S.-China bilateral trade deficit has very little to do with the renminbi. It re fl ects the fact that America does not save and countries that do not save have to import surplus savings from abroad.

U.S. politicians did not want to accept their responsibilities for the unemployment rate, which was close to 10 percent, so they preferred to blame someone else.

The United States had trade de fi cits with more than 90 countries in 2008. The biggest bilateral deficit was with China because of U.S. multinationals’ outsourcing strategies and because American consumers demanded low-price high-quality goods made in China.

The Yuan as a World Currency

Jim O’Neill, chief economist at Goldman Sachs Group Inc.

The renminbi’s importance is greater than people in the West realize. While formerly undervalued, the currency’s worth is not taken lightly anymore. It’s unfortunate that we have so much political angst around this issue.

China’s yuan is destined to become a global reserve currency rivaling the dollar and the euro, as the nation’s economic power increases the currency’s allure.

The Chinese Government will eventually allow the yuan to trade freely on foreignexchange markets. As China moves in this direction, other large emerging economies will presumably move in the same direction and the end result will be something similar to today’s Western monetary system. Under such a system, the renminbi, dollar and euro would all form the pillars of the world’s currency markets.

Unnecessary Appreciation

Daniel Griswold, Director of the Center for Trade Policy Studies at the Cato Institute

A stronger yuan would not be a fix-all tonic for the U.S. economy or manufacturing and it would be a huge mistake to raise tariffs on imports from China to force a change in the yuan.

China has been moving in the right direction since 2005 by allowing its currency to appreciate. Threats from the U.S.Government actually make it more dif fi cult for the Chinese Government to resume appreciation because it would look as though Beijing was giving in to foreign pressure.

China would remain competitive in a broad range of manufactured products even if the yuan were 25 percent higher. The dollar depreciated sharply against the currencies of Canada and the euro zone after 2002, yet our bilateral de fi cit with both those regions continued to grow.

American families benefit from affordable consumer products from China,while U.S. companies benefit from exports to China. And all Americans benefit from lower interest rates from Chinese investment in U.S. Treasury bonds.

The goal of the U.S. Government to double exports in the next five years will be dif fi cult to realize. It hasn’t been done since the 1970s, and that was driven in large part by in fl ation. It also depends on robust growth abroad, which is beyond the control of even this president. Faster export growth would be good for the U.S. economy, but it will not put much of a dent in its high unemployment.

Uncertainties Loom

Yi Xianrong, a senior researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences

As the Chinese economy on its path to recovery, appreciating the yuan will only be a stumbling stone.

It will hurt the competitive edge of exports by making Chinese goods less affordable overseas. This is a deadly blow to exporters who have only recently started to see rays of hope after painful gloom.

More disturbing, though,is the risk that international speculative hot money will pour into China, expecting a risk-free source of pro fi t from gains in the value of the yuan.

With history as a guide,the consequences of a stronger yuan are monumental. In 2005, China ended its peg of the yuan to the U.S. dollar, a step that resulted in a rapid appreciation of the currency and put many coastal exporters at risk of hemorrhaging money. This was the biggest setback to the Chinese economy at that time, though grossly overshadowed by the ensuing financial storm.

Financial woes were no less acute between 2005 and 2007. Torrents of hot money snuck in, stoking up asset bubbles and sowing the seeds for a downturn of the broader economy in the latter half of 2008.

A Stable Yuan Is Key

Zhou Shijian, a senior researcher with the Center for U.S.-China Relations at Tsinghua University

Even if China appreciates the yuan by 40 percent, U.S. trade de fi cits with the China would by no means decrease. From 2005 to 2008, the yuan gained 21 percent while the deficits increased 49.6 percent de fi antly.

By pointing fingers at the Chinese currency, the U.S. Government just wants to find a scapegoat for growing domestic unemployment. Meanwhile, we cannot rule out the possibility that it is trying to slow down the Chinese economic juggernaut.

Of course the currency appreciation will provide a powerful catalyst for Chinese exporters to upgrade technologies and focus on higher-end products. But the advancement should be a gradual process that leaves a breathing space for enterprises to restructure themselves.

China should cap annual appreciation of the yuan under 3 percent to provide a stable environment for the economy to grow.

Japanese Lesson?

Ha Jiming, chief economist with China International Capital Corp.Ltd.

What will happen if China sharply appreciates its currency? A close look at Japan’s experience could provide some insight.

After giving in to U.S. pressure to strengthen its currency in the 1980s,Japan paid a terrible economic price. The Japanese yen almost doubled in value between 1985 and 1987, putting exporters on a tight spot.

By slashing the interest rate to a record low, the government tried to make up for a collapse in exports. But the massive cheap credit did not fi nd its way into manufacturing or services as expected. Instead, property markets absorbed the cash, thus sending house prices skyrocketing. The bubble eventually popped in the early 1990s,leaving the economy in a decade-long state of malaise.

China has a reason to worry about a Japan-style crunch. Its number of home buyers is estimated to start shrinking in 2015, similar to what Japan experienced around 1990.

In addition, China’s export sector would be more vulnerable to currency appreciation than Japan—it has few global brands to rely on.

Businesses at Risk

Gao Peikun, General Manager of Beijing Garments Import &Export Corp.

If the yuan strengthens 3 percent over three months this year, our company will come under significant financial pressure or even be forced into bankruptcy.

In defense of the possible rise of the yuan, exporters usually have only three countermeasures available.The first is to increase export price. The second is to strengthen operational efficiency and save costs, or move up the value chain to sharpen their competitive edge. The third is to hedge against the exchange risks by buying export credit insurance.

But 95 percent of Chinese exporters are lower-end original equipment manufacturers and have little say in pricing. So they can hardly increase prices and would otherwise lose orders to Viet Nam, India and Pakistan.

In addition, few enterprises are now interested in export credit insurance. The coverage rate of export credit insurance in China was only 9.7 percent in 2009, well below the world average of 15 percent. The biggest problem was there were few financial products being offered and the charge was staggeringly high. ■