China’s Approach to its Currency: A View From the Other Side

Many experts believe that China’s currency is at least 30% to 40% undervalued, and that for its own good, as well as the good of its trading partners, China should undertake a significant revaluation of the renminbi. When this group looks at China’s policy of gradualism, they see a cup that is half empty.

But, there are two sides to every argument. For many of those in China who are already dealing with an appreciating currency, evenChina’s current policy is fraught with danger, and a more radical approach is simply out of the question. As is the case with anything relating to China’s huge economy, the numbers are mind boggling. As a result of a rise of just 5 to 10% in the value of the yuan, according to a study by China’s Institute of Labor Science, “about 3.5 million workers in non-agriculture sectors might lose their jobs and some 10 million farmers could be affected.” For this group, the cup is more than half full.

No matter how you view the contents of China’s currency cup, the fact is that when one economic factor in a large complicated economy like China’s changes significantly, other factors will be affected in very real and often unpredictable ways. For this reason alone, China’s leadership, in my opinion, will never agree to more radical measure towards its currency, no matter the pressure. The potential downside for the country’s domestic economy, in their view, is simply too great. In the interest of presenting the view from the “other side,” a recent article from the China Daily on this subject is reprinted in its entirety below.

Sharp rise of yuan may cost millions of jobs

By Xin Dingding (
China Daily)
Updated: 2007-05-30 08:35

Labor experts have warned of huge job losses if the Chinese currency continues to appreciate sharply.

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A study by the Institute of Labor Science affiliated to the Ministry of Labor and Social Security said if the yuan rises by 5-10 percent, about 3.5 million workers in non-agriculture sectors might lose their jobs and some 10 million farmers could be affected. The yuan has risen by more than 7.5 percent against the US dollar since
China scrapped the peg to the greenback in July 2005. The central bank set the yuan’s central parity rate at 7.6538 to the dollar yesterday, compared with 7.6512 on Monday when it hit a new high.

A stronger currency makes Chinese exports more expensive in overseas markets, damping demand; but at the same time, imports would be cheaper. The study said five non-agriculture sectors – textile, apparel, footwear, toy and motorcycle industries – would bear the heaviest brunt; as would agriculture. “The five non-agriculture industries are all labor-intensive, relying heavily on exports. Any appreciation will curb exports and wipe out enterprises’ profits, which are already thin – between 3 and 5 percent,” said You Jun, head of the institute, who compiled the study report with Guo Yue. “The apparel and motorcycle industries will suffer most, because both have little or no processing trade,” he said. For enterprises involved in processing trade, the negative impact of the currency appreciation can be offset by lower prices of imported raw material and spare parts. The footwear and toy industries, which rely on exports, will also suffer greatly. In the best-case scenario, the appreciation might only slow the growth of employment. But in the worst, all five industries – which provided 24 million jobs in 2004 – could shrink; and 3.5 million people could be sacked, the study predicted.

Beijing, Shanghai, Tianjin and Dalian cities; andGuangdong, Jiangsu, Zhejiang, Fujian and Shandong provinces will suffer more than other regions. The rise of the yuan’s value will also hinder the export of agricultural products, and allow more imported agricultural products at a cheaper price. “If the yuan rises 5 to 10 percent, the price of imports of soybean, cotton, winter wheat and corn will drop by 5 to 10 percent, and as a result, the cultivated area will shrink,” the study said. About 100 million farmers make a living on the four crops, and it is estimated at least one in 10 will be affected.

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