The US Economy v/s Chinese Currency
Kamel Wazana Al-Hayat - 08/10/06//
US-Chinese relations are experiencing several difficulties. In addition to the growing Chinese military power, the US spy accusations against China, the lack of respect for intellectual property, as well as the violation of human rights; China is under pressure to float its currency, allowing the exchange rate to be determined by supply and demand in the financial market.
Financial officials in the Group of Seven are putting pressure on China to allow its currency to rise against the dollar and the euro. The Chinese government allowed the country's currency to rise in value past the level of 7.9 to the dollar for the first time, climbing one percent against the dollar since its previous high, 8.2.
In July 2005, China agreed to lift the value of the yuan by 2%. The US and other countries in the region showed interest in the rate of the yuan, and considered that the Chinese national currency is in fact being traded in the market under its real value. This accusation gives China significant economic options, as pegging the currency at its current level means to continue to promote the export of its commodities to the detriment of the US industry.
According to economists, this is the main cause of the deficit in trade balance, which exceeded $200 billion in favor of China.
China indicated that pegging its currency in the financial markets is not intended for making incentives in trade exchange, but it is an integral part of promoting economic growth, and that fluctuation in the exchange rate of the yuan has important economic connotations that do not serve the Chinese economy.
The International Monetary Fund (IMF) and the US accused China of violating Article IV of the IMF Agreement, which reads: "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members". Some researchers believe that the Chinese yuan should rise by 40% to reach its real value, according to a November 29, 2005, Congress study.
On the other hand, eight IMF studies showed a difference in the price of the real value of the yuan. The IMF's experts attributed the cause of the discrepancy in the figures to the method applied to the research. At the same time, Chinese officials insisted that the US cannot hold China responsible for the economic deficit. Furthermore, they also insisted that the US must not be allowed to continue borrowing from the Asians to be able to buy their goods, given that the US is running into debt to finance the investment and spending and to support the Treasury deficit.
In addition to the US and the IMF, Japan clearly demanded China in September 2005 to further devaluate the yuan. This is one of the options that the US may resort to.
Devaluation of the currency has enjoyed the support of the White House and some members of the Senate, who have recently defeated a legislation to impose custom sanctions on China of up to 27%. This came after Treasury Secretary Henry M. Paulson insisted to give the Chinese ample opportunity to change and redress their economic course, especially as China itself would benefit in the event of allowing banks and foreign financial institutions to work more freely within the country. He added that any change in monetary policy is important for both China and the global monetary system. Indeed, voting on the bill was postponed.
The options the US may take if China does not respond effectively to opening its markets and base the devaluation of its currency on the supply and demand factors include the following:
First: retaining pressure on China to change its monetary system, and keep the language of threats to impose sanctions, thereby increasing taxes on Chinese goods and causing the volume of exports to the US to drop.
Second: resorting to the IMF to take decisions involving several countries to put pressure on China to deregulate its currency price.
Third: lodging a complaint with the World Trade Organization (WTO), accusing China of using an unfair method to achieve incentives at the expense of the interests of other nations.
Members in the Senate adopted a draft bill to impose taxes, estimated at 27.5%, on all goods imported from China if it does not respond and raise the price of its currency against the dollar. There is also a law that requires the US administration to submit a detailed biannual report to the Congress on the Chinese currency.
In return for all these interactions, the Chinese currency remains a powerful weapon that bolsters the State treasury, whose reserve hit $954 billion in July 2006. It is expected to exceed one trillion in the coming months.
All these political pressures will not be able to influence trade with China, which amounted to $1422 trillion. The Chinese leaders know very well that raising the value of the yuan cannot break the political deadlock or solve the problem of the trade exchange volume with the US. Therefore, the value of the Chinese currency will be slowly increased and the pressures will not alter its rate, because China considers that its national economic interests are above all other considerations, and that the real change must begin in the US through changing the economic rules in American society, which needs to borrow $3 billion a day, in addition to the recent question of low saving.
Therefore, all these discrepancies between China and other major industrial countries will lead to further pressures and economic tensions.
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