On Monday, China started a new flexibility in its currency exchange rate. This may finally signal that the world’s third- largest economy wants to be a responsible player in the global financial system rather than keep on manipulating its currency in order to remain the world’s factory for low-priced exports.
It may also signal that China’s Communist Party may be starting to trust its citizens to make their own economic decisions.
The currency shift will allow Chinese goods to become more expensive in the US (thus partly meeting Mr. Obama’s wish) but also help boost American exports to China – creating more jobs in the US (an even more important Obama goal this year).
How many US jobs might be created by a Chinese currency shift?
If the yuan (also known as the renminbi) is allowed to increase in value by 20 percent, that could produce as many as 1 million US jobs, according to one leading expert. But such a large shift will likely not happen soon. For now, China had made only a vague promise to be flexible in its controls over yuan trading. In fact, many experts forecast the new policy will lead to only a 2 to 4 percent change this year.
If true, that would likely not be enough to satisfy those in Congress who want China to end this mercantile system, one that has come at the expense of American workers who have lost their jobs because of inexpensive Chinese imports.
These critics say the yuan needs to change as much as 40 to 50 percent to reflect its free-market value. A bill in Congress would slap tariffs on Chinese imports until China allows such free trading – a threat of trade protectionism with serious repercussions. US Secretary of the Treasury Timothy Geithner, in fact, says the test for China now is “how far and how fast they let the currency appreciate.”
The timing of China’s announcement, however, indicates it may be merely a political move to fend off foreign pressure rather than a real change of heart in its economic approach. The announcement came just days before a summit in Canada of the Group of 20 leading industrial economies (which includes China). And it also comes as US lawmakers start to campaign for reelection.
Still, China’s central bank did cite the new policy’s benefits for China itself, such as how it would help rein in inflation and reduce the country’s high dependence on exports for growth.
China has dug itself into a trap by following Japan’s growth model, or the use of nonmarket means to boost exports. It is now highly dependent on the US and Europe and, when those markets either collapse in recession or rebel against China’s tactics, that economic strategy becomes vulnerable.
What is needed is a shift to a vibrant domestic economy that can lift up more of China’s peasants and stabilize the country. Protests among factory workers are rising, a sign of increased volatility in China’s exports-first policy.
Becoming a mature economy means China must adopt market principles that are sustainable and open. A controlled economy only creates distortions that are not sustainable.