How High Must the Yuan Rise before the U.S. Is Satisfied?

In recent meetings, the leaders of China and the U.S. have spent much time discussing the question of sanctions for Iran, and also debating the issue of the exchange rate for the yuan. Chairman Hu Jintao has asserted that a rise in the value of the yuan would not resolve the issue of the trade imbalance between China and America, nor would it solve the problems of unemployment in the U.S. No amount of external pressure will influence the reforms being made to the mechanisms that shape the RMB exchange rate. So, how great is this external pressure and what value do they expect the yuan to have?

According to Peter Morici, a professor of economics at the University of Maryland, the yuan is undervalued by 40 percent. This notion has gained a great deal of currency in America and, as a result, a few members of the U.S. Congress have placed the blame for unemployment in the U.S. on the low value of the yuan. For this reason, they urge that China should be added to the list of nations that manipulate exchange rates, as a way of exerting pressure on the Chinese government. They ultimately hope to see the yuan rise in value by 40 percent, but this idea is already several years old and, in the meantime, there have already been a series of increases in value. Nonetheless, the idea of a 40 percent increase is still widespread in America and that means they will only consider it sufficient if the value of the yuan falls to around four yuan per dollar!

This drop would be so great that they themselves do not expect China to agree to it. Thus, it is clear that this has been a bargaining technique all along. Early on, they produced a high, theoretical target with which to threaten us. Afterward, they proposed a high price, we answered with a low price, they conceded a little, we advanced a little and we haggled them down to an agreement on a value in the middle. Indeed, the Chinese chairman’s attendance at America’s summit for international heads of state is a concession made by China in response to America’s act of goodwill in not listing China among the nations that manipulate exchange rates. This has already been settled, meaning that Chairman Hu Jintao has responded firmly on the issue of the exchange rate.

America’s foreign currency market has made its own determination on the exchange rate, aside from the one that is expected by the U.S. Congress and the administration. They widely hold that, in the near future, China might let the yuan rise 2-3 percent in value. According to this calculation, at that time, the yuan will be valued at a rate of only five to six yuan to the dollar. Furthermore, they assume there must be some time to adjust, so from beginning to end the process would take several months. Gradually, this will come to benefit both China and America, especially if one considers what Obama needs during the American mid-term elections.

Let us take a lesson from the bilateral trade negotiation methods previously used by Japan with the United States. The Japanese persisted in looking after their own interests and, when they were compelled to make concessions, they seized on the opportunity to reorganize their own industrial infrastructure. While they implemented these changes, they put off what they could, and the experience was very worthwhile!