Yuan bashing a missed opportunity for US
Stephen Roach says by fixating on the weakening yuan, the US is missing an opportunity to restructure its own economy and benefit from China's rebalancing towards domestic demand
The yuan has been weakening in recent months, resurrecting familiar charges of manipulation, competitive devaluation and beggar-thy-neighbour mercantilism.
In mid-April, the US Treasury expressed "particularly serious concerns" over this development, underscoring what has long been one of the most contentious economic policy issues between the United States and China. This is a timeworn debate - politically inspired and grounded in bad economics - that does a serious disservice to both sides by diverting attention from far more important issues affecting the US-China economic relationship. Taken to their extreme, America's accusations risk pushing the world's two largest economies down the slippery slope of trade frictions, protectionism or something even worse.
First, the facts: since hitting its high-water mark on January 14, the yuan has depreciated by 3.4 per cent relative to the US dollar up to April 25. This follows a cumulative appreciation of 37 per cent since July 21, 2005, when China dropped its dollar peg and shifted its currency regime to a so-called "managed float". Relative to where it started nearly nine years ago, the yuan is still up 32.5 per cent.
Over the same period, there has been a dramatic adjustment of China's international balance-of-payments position. The current-account surplus - the most telling symptom of an undervalued currency - has narrowed from a record 10.1 per cent of GDP in 2007 to just 2.1 per cent last year. The International Monetary Fund's latest forecast suggests that the surplus will hold at around 2 per cent of GDP this year.
Seen against this background, US officials' handwringing over the recent modest reversal in the yuan's exchange rate appears absurd. With China's external position much closer to balance, there is good reason to argue that the renminbi, having appreciated by nearly one-third since mid-2005, is now within a reasonable proximity of "fair value". The IMF conceded as much in its latest in-depth review of the Chinese economy, which calls the yuan "moderately undervalued" by 5 to 10 per cent. This stands in contrast to its earlier assessments of "substantial" undervaluation.
America's fixation on the yuan is a classic case of political denial. With US workers remaining under intense pressure in terms of both job security and real wages, politicians have understandably been put on the spot. In response, they have fixated on the Chinese component of a gaping trade deficit, claiming currency manipulation is the culprit behind the long-festering woes of the American middle class.
This argument is politically expedient, but wrong. The US trade deficit is a multilateral imbalance with many countries (102 in all), not a bilateral problem with China. It arises not from the alleged manipulation of the yuan, but from the simple fact that America does not save.