Tuesday, January 18, 2011

Misunderstanding China and Economics

The South China Morning Post reports that "newly elected Republican lawmakers are itching to act against what they see as an undervalued yuan that is costing American jobs".

They are unlikely to have any more success in changing China's course on this matter than the previous Democratic majority did. All they are doing is displaying both their lack of understanding of China and their simplistic ignorance of basic economics. There is no mystery over China's policy - Chinese leaders have made it clear for years now that they are willing to let the yuan rise gradually and to move step by step towards making it freely convertible - both of which they have been doing. But anyone who knows China is aware that what its leaders fear most is any sudden disruption that could lead to mass social disorder - and an abrupt jump in the value of China's currency could trigger exactly this by throwing millions out of work.

But if by some unlikely chance the Republicans did achieve their objective, what then? In the short term, there would be a sharp rise in inflation in the US (and Hong Kong, incidentally) as all the China-made goods on supermarket shelves (which these days means most manufactured products) jumped in price. And in the longer term, would all those jobs in China come back to the US? Not likely, with so many other cheap labour countries lining up with open arms - far more probable that they would move to Vietnam, Indonesia, Brazil, Bangladesh, South Africa, wherever ...Meanwhile, those products that America does still produce would become more expensive in China, throwing even more Americans out of work.

Hong Kong, with its currency peg to the US dollar, would suffer collateral damage from all this. I have always maintained that, while the institution of the peg was a necessary - indeed, vital - move at the time, it should have been to a basket of currencies and not to one alone. America was at the time our main trading partner, but changing times have seen the Mainland fill that role. The reality is, no matter how much our leaders may deny any plans for a change (as they have to do, or the currency speculators would be circling overhead like vultures), sooner or later we will probably have to realign our currency to the renminbi rather than the US dollar. The only question is when.

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