US wise not to press too hard on yuan
The US Treasury decision not to brand China a currency manipulator was sensible economics, politics and diplomacy. To have done otherwise would have strengthened the hand of those in the United States who try to shift the blame for the nation's soaring national debt from where it belongs - at home. And it would have been a serious blow to relations with an emerging rival superpower. It is less than a month since President Hu Jintao made commitments in Washington to work towards economic and financial reforms consistent with greater currency flexibility.
While Washington is impatient about the pace of progress towards these aims, it is wise to take these assurances at face value - to use the words of Treasury Secretary John Snow - and resist domestic political pressure to set a deadline for Beijing to allow the yuan to rise in value.
Many in the US, including politicians and supporters of its manufacturing sector, blame an undervalued yuan and cheap imports from the mainland for America's soaring trade and budget deficits and the loss of manufacturing jobs. These are serious issues. But it is a populist argument that puts the blame in the wrong place. The cause of the deficit is to be found in Americans' appetite for Chinese imports for which there are few domestic substitutes and their enthusiasm for spending their cash on imports generally rather than saving. The low national savings rate of just over 1 per cent of gross domestic product forces the US to borrow capital from abroad. The mainland is now second only to Japan as a lender to the US.
In any case, it is also doubtful whether a revaluation of the yuan on its own would be effective in reducing the US trade deficit. Most of the goods the mainland sells to the US are not widely produced in America. About half fall into the categories of office machines, clothing and footwear and toys and other plastic goods. These account for less than 5 per cent of American manufacturing.
There remains a strong case for Beijing to press on with more urgency in liberalising its currency policy. It would bring much-needed flexibility to economic management through a boost in domestic consumption. But Mr Snow was right to say that the best course is to let the yuan over time find its own value by letting market forces play out.
The threat of sanctions against China in the form of a 27.5 per cent tariff on its exports remains. Congressional critics have set a deadline of September 30 for Beijing to revalue the yuan or they will push ahead with legislation. If it were put to a vote ahead of elections in November it could win a lot of support. But even such a punitive tariff on mainland goods would do little to cut US unemployment, while doing a lot to hurt poor Americans who rely on cheap goods, and poor Chinese who depend on the money they earn from making them. The cost of a range of goods that the US does not make would rise at a time of concern about inflationary trends.
Beijing recently made a small but significant concession to market forces by easing capital controls. More financial institutions are to be allowed to invest foreign currency holdings in overseas securities and bank deposits. Calls for faster and broader reforms have merits but Beijing would be sensible to loosen or abolish controls cautiously. The flight of a vast amount of capital would likely weaken the yuan and hurt both China's economy and US investments on the mainland.
Ironically, on the same day the US government resisted pressure to declare China a currency manipulator, the House of Representatives passed tax cuts that will cost US$70 billion over five years. This will add to the budget deficit, which is heavily financed by the mainland from its trade surplus. China's investment in low-yielding US treasury bonds also helps cap interest rates and maintain a buoyant US economy and stock market. The world's biggest debtor nation has a good reason not to rock the boat by making China the scapegoat for the consequences of its own high-spending, low-saving policies.