US jobs report puts spotlight back on yuan
Pressure on Beijing to revalue the yuan upwards against the dollar is expected to heat up after a dismal jobs-creation report in the United States. Attention has focused again on the sputtering US labour market at a time when trade statistics show China's trade surplus rose dramatically during the same period.
The US economy added a meagre 1,000 jobs for the month of December, in contrast to surging export growth in China which helped boost the country's trade surplus by 81 per cent from the same month a year earlier. Although the overall US unemployment rate declined during the period from 5.9 to 5.7 per cent, the decline was due to 309,000 people leaving the labour market.
In view of the disappointing job creation figures, analysts believe special interest groups will step up political pressure and prompt a more aggressive stance on the yuan from the Bush administration during an election year.
Richard Duncan, a former World Bank currency analyst and author of the 2003 book The Dollar Crisis: Causes, Consequences and Cures, says it is likely Beijing will move on the currency issue faster than most believe, with a revaluation to be announced within the next two months.
He expects China to unpeg from the dollar and relink to a basket of leading currencies, a move that should garner an immediate 5 to 7 per cent rise in value of the yuan against the dollar, a target substantially above the current speculation of 2 per cent.
'It is not going to reduce American pressure for them to revalue if they only revalue by 2 per cent,' says the Hong Kong-based analyst.
Under a normal exchange rate system, countries with large trade surpluses would see their currencies rise in a process that would erode competitive advantage and eventually restore equilibrium to the system. Because the yuan is effectively pegged to the dollar, the steep decline in the greenback vis-a-vis the euro and other leading trade partners has brought little relief to US manufacturers.
Appeasing the Bush administration on the yuan issue during an election year may give Beijing added leverage in Washington, but Mr Duncan believes that China may have self-interest at heart. Boosting the yuan would probably cool its surging trade surpluses and lead to a cooling of money supply growth estimated to be running at 22 to 23 per cent per year.
'China is loosing control of its money supply,' he says.
A hidden benefit of a revaluation by China would be an end to the seven-year deflationary hangover plaguing Hong Kong.
'Instead of people going across the border to buy things more cheaply and bring it back here, it won't be quite as cheap, there will be somewhat less deflationary pressure. In that respect the more China revalues, the better it is for Hong Kong.'
