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Spread this message with Digg, Del.icio.us, Reddit, or Stumbleupon, and subscribe to the RSS Feed to track articles True Impact Of Recent Chinese Currency RevaluationE-mail - editor@economyincisis.org |
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Eamonn Fingleton explains the recent move in July 2005 by Chinese authorities to revalue their currency. Although popular sentiment heralds this as a US victory, it is shown below how it is far from the move that America needs, meanwhile it is making acquisitions by China even cheaper because their currency is now stronger. Last week's decision by the Chinese authorities to cut the renminbi's link with the dollar is the start of a major restructuring of world currency markets. Although in the short term the dollar may remain quite strong (because China has a strong interest in warding off any run on the dollar), in the fullness of time, China's move will be seen as a watershed at least as important as the Plaza Accord of 1985. Certainly it presages a strong move upward by most of the East Asian currencies in the next few years. Too Little, Too Late Although the American press has focused on the 2 percent initial move, of far more importance is the 0.3 percent daily movement provision. Moves of 0.3 percent a day add up. Of course the Chinese authorities will not permit a clean float, but over three or four years we could see the renminbi rise by 50 percent or more against the dollar -- and even then it will not be enough. In a contribution to The International Economy in 2003 I argued that "a revaluation of 30 to 50 percent is called for--and quickly." As of 2005 a renminbi revaluation of even 70 percent will not do much to restore American trade competitiveness. As for the Japanese yen we can expect an upward move in the next three or four years of at least 30 percent from its pre-announcement level of Y112 to the dollar. Of course, this too will not be enough as the yen, judged by the size of Japan's trade surpluses, is even more undervalued than the renminbi. Chinese Move Reflects East Asian Coordination First reports of last week's announcement gave the impression that China's decision was a unilateral decision but that is clearly far from the case. The decision would have to have been discussed in advance with several East Asian nations. Japan in particular would have been consulted because it is the senior partner in the East Asian roster of nations engaged in propping up the dollar. (The extent to which each nation is engaged in propping up the dollar is a function not of its bilateral surplus with the US but of its current account surplus overall -- and Japan's current account surplus last year, at $181 billion, was not only a record for any nation in history but was more than 2.5 times China's figure. Japan's current account reflects the fact that Japan now exports to the United States not only directly but through China -- thus much of what Japan exports arrives in the United States labeled "Made in China.") The clearest evidence of region-wide East Asian coordination is that the Malaysian central bank immediately acted to float the Malaysian currency. In a bureaucratically run country like Malaysia (a country moreover that depends heavily on Japan and Korea for its inward industrial investment), such a decision would not have been taken on the spur of the moment. And if Malaysia was consulted, all the several East Asian nations with a larger economy than Malaysia would no doubt also have been consulted. Beginning Of The End For The Dollar The Chinese decision is a tacit admission that the East Asians are encountering more and more trouble propping up the dollar. They need to let some air out of the dollar balloon now to avoid a potentially uncontrollable implosion later. That said, if the East Asians have anything to do with it, the dollar will not find its own level until after the 2008 Presidential election. The East Asians fear that if American voters understood how weak the dollar's fundamentals are, candidates supporting protectionist policies could reap great electoral advantage in 2008. Essentially this is the beginning of the end for the dollar – the equivalent for the United States of Harold Wilson's devaluation of the pound in 1967. The best recent account of how undermined the dollar has become is by Clyde Prestowitz in Three Billion New Capitalists. Like others before him, he has shown that the American economy is now so hollowed out that there is essentially no exchange rate at which it could balance its trade in any reasonable period. He writes that "most analysts would like to see a smooth, gradual decline of 30-50 percent from present dollar values." The evidence he adduces for this statement will come as a shock even to many in Washington who think they understand the seriousness of America's trade problem. A Weak Dollar Places American Future In The Hands Of Other Nations’ Planned Economies Is a weak dollar in America's interest? Like every other economic initiative, a weak dollar entails both pluses and minuses. One major minus is that it makes it cheaper for foreigners to buy up American companies and other assets in the United States. A major plus is that it will make it easier for America's remaining exporters to remain in business and thus preserve America's rapidly dwindling industrial jobs. If Americans want to ward off wholesale foreign ownership of their economy, there are other measures -- specifically tariffs -- that would be much more appropriate to the effort to preserving American jobs. But as of today, the foreign trade lobby in Washington enjoys such control of America's trade agenda that tariffs are considered unthinkable. Click here to contact your Representative in Congress. Spread this message with Digg, Del.icio.us, Reddit, or Stumbleupon, and subscribe to the RSS Feed to track articles
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