Tensions between China and the U.S. on yuan revaluation may trigger a real trade war followed by protectionist measures against Chinese goods. Cheap Chinese jewelry exports to the United States and European Union appear to be exposed. The United States accuses China of deliberately manipulating its currency rate, while China is in no hurry to hoist its yuan for a strappado torture in an environment of still progressing aftereffects of the economic downturn to suit instructions coming from the West.
In the opinion of the U.S. government, China is trying to keep the advantage of its exports by keeping the rate of its national currency at an artificially low level (American experts think it is 25% below the dollar, PRIME TASS says). According to the Economist Online, Paul Krugman, a Nobel Prize winning trade economist, believes that in this situation the United States should simply introduce an import surcharge on Chinese goods in the amount of these same 25%.
Beijing has about $2.6 trillion and the U.S. federal budget deficit in the fiscal year ending on September 30, 2010 totaled $1.294 trillion, or 8.9% of GDP (according to RIA Novosti). People with rich imagination may even suggest that the yuan rate which for some time remained at around 6.66 yuans to 1 U.S. dollar was a kind of hint from China to the Americans for whom three sixes are a sign of the devil (and apocalypse at the same time) as to what will happen to their economy, if China decides to reduce the dollar share in its reserves in any significant way.
British Prime Minister David Cameron has joined the U.S. calls addressed to China to reconsider the yuan rate and its growth speed. At the end of his November visit to Beijing, Cameron said he hoped that China would allow its currency to grow quickly to put exports from other countries in a fair competition context. Well, it was quite understandable that his aim was, of course, to increase exports from Great Britain to China by all means to justify his own predictions about 'tripled British exports to China by 2015,’ as The Telegraph wrote.
The Chinese authorities are pointing to intensification of the trade war between the U.S. and China. China fears that attempts by the United States and Europe to force the yuan gain faster versus the dollar and euro may stoke inflation and damage Chinese businesses, China’s Ministry of Commerce believes. In August 2010, China's trade surplus with the U.S. reached $28 billion, www.israelidiamond.co.il said citing the data released by the Chinese Ministry of Commerce.
The currency fight was one of the main subjects discussed at the G-20 summit held on November 11-12, 2010 in Seoul (South Korea). Incidentally, I was lucky to be in Seoul at this time and felt the atmosphere. The United States were not supported by the other summit participants in its pressure on China. It is useless to press the Chinese especially now when China is in a good economic shape and sits on a thick financial cushion. As the history shows, it is possible and necessary to deal with the Chinese by way of negotiations, for they are pragmatic and farsighted.
New York Mayor Michael Bloomberg was even skeptical in this context saying there was no need shifting the blame to other shoulders, apparently meaning that the United States should not blame China for the U.S. problems. "If you look at the U.S., you look at who we’re electing to Congress, to the Senate - they can’t read. I’ll bet you a bunch of these people don’t have passports. We’re about to start a trade war with China if we’re not careful here. Only because nobody knows where China is. Nobody knows what China is," he said in an interview to the Wall Street Journal during his November visit to Hong Kong.
The desire to "push" China is also dangerous because one may face a quip of Chinese wisdom - if you sit by the riverbank long enough, one day you may see your enemy's corpse float by. “The Art of War” by Sun Tzu in action.
In early 2011, probably in April, Hu Jintao will pay a state visit to the United States at the official invitation of the U.S. President. Will this meeting solve the currency rate issue? Largely it depends on what the United States will be prepared to offer China for this trade-off. Previously, Li Daokuy, a member of the Monetary Policy Committee of the Central Bank of China, said that Beijing might be willing to strengthen the yuan versus the dollar, if Washington would respect the "essential interests" of China.
It is noteworthy that China itself is gradually moving to upvalue the yuan. Over the past 5 years China's currency depreciated by about 17%. In July 2005, the Chinese government launched a reform to upgrade the management mechanism of its national currency, renminbi, and started a smooth process of revaluating the yuan. Hitherto the rate had been consistently held at the level of 8:1. Today, in China the dollar is worth only 6.6 yuans. To show the difference more clearly, let’s have an example from everyday life.
In 2005, a salary of $2,000 in China was equal to 16,000 yuans. In 2010, a salary of $2,000 is not the same thing as 5 years ago since it will yield only 13,320 yuans and not 16,000 yuans as before. In 2005, the difference - nearly 2,700 yuans – could be used to rent a bed-sitting flat or a studio apartment in Beijing or Shanghai in a good area. In 2010, you may just forget to have a chance to rent anything decent for this kind of money, at least in Beijing or Shanghai.
Thus, we can say there are two trends having the same vector:
- Appreciation of the yuan entails more expensive Chinese exports exposing cheap Chinese jewelry whose current advantage is the price.
- Domestic inflation and rising prices for real estate, consumer goods, utilities, etc. bring about a gradual increase in wages, cost of living (even taxi fares are going up significantly) and higher labor costs.
This means that China is slowly and steadily becoming more expensive and, hence, it is becoming less profitable to produce goods in China. In addition, it is believed that the Chinese economy is overheated by foreign investments which actually brought an end in 2008 to the free economic zones that played an important role in its development. In this way the Chinese government restructured the mechanism of tax incentives from the geographical principle to the industry-oriented principle.
Let’s see this in more detail. Experts from the China Window Consulting Group say that the current basic profit tax allowances are formulated by China’s Law "On corporate taxes" which came into force on January 1, 2008 and established a uniform income tax for companies with Chinese and foreign capital. Along with enacting this law China generally cancelled tax abatements tied to the place of incorporation and location of enterprises, which reduced the advantages for companies with foreign capital seated in special economic zones. Prior to 2008, companies with foreign capital were able to take advantage of the special tax regime practiced in special economic zones, which allowed to pay income taxes at a reduced rate and get tax breaks on a "2 +3" pattern (meaning a 2-year exemption from the corporate tax plus the next 3 years of tax payments at the rate of 50%). Now these rules are applied only to companies established before the single tax became operative and are valid only until the established transitional period expires.
So far China remains an attractive center for global jewelry manufacturers, but the two trends described above will gradually pull jewelry manufacturing away from China to some other place where production is cheaper. For example, to India or Africa.
Recently, the www.israelidiamond.co.il portal flashed a piece of eye-catching information saying that Chinese jewelry manufacturers are already looking to India and making plans for future relocation to this source of cheap labor and raw materials. However, the news somehow got quickly lost, and even persistent attempts to search the web did not yield its traces.
Already now China holds key positions in Africa. The trade volume between China and Africa accounts for 75% of the total trade volume maintained by the BRIC countries, leaving behind India (20%), Brazil (11%), and Russia (4%). China's success story in Africa is very impressive – this nation has become the continent’s second largest economic partner after the United States.
In November 2009, the 4th Forum on China-Africa Cooperation summed up the results over the past decade and announced China’s further plans in Africa. Beijing pledged to give $10 billion in concessional loans, to establish a $1-billion fund for crediting small and medium-size African companies, to introduce a zero duty for 95% of goods from the poorest countries in Africa, to write off some debts, to provide medical equipment worth $73 million for 30 hospitals, to build 50 schools and 100 facilities for producing clean energy from renewable sources. In exchange, China will receive exclusive access to mineral resources and contracts for building infrastructure facilities, wrote in her work Larisa Andreeva, Senior Fellow of the Center for Civilizational and Regional Studies at the Institute for African Studies of the Russian Academy of Sciences.
She also mentions that in Deborah Brautigan’s path-breaking book “The Dragon’s Gift,” which analyzes the evolution of Chinese policy in Africa, the author cited a remark made by a Nigerian diplomat: "The Chinese are trying to participate in every sector of our economy. If we look to the West, it is oil, oil, oil and nothing else."
According to many experts, Africa will become a new focus of economic development after Asia. “After the Asian Tigers, it will be the turn of the African Lions," predicts Sanusi Lamido Sanusi, governor, Central Bank of Nigeria, in an article posted on http://knowledge.insead.edu. For China, it seems to be already yesterday’s news.
Apart from Africa, China is investing in mining projects in other countries. One recent example is the news that China will become one of the main financiers and engineering partners in the gold mining project in Ecuador, which (according to Ecuador) will only bring benefits to the economic development of this country. Thus, China is becoming an important partner for Latin American nations as well.
It seems that the far-sighted and pragmatic Chinese have been long working to find further ways to expand their own industry bringing it beyond its home boundaries, when production inside China will become less economically useful or, say, too bad for the natural environment. Therefore, even if the scenario presuming yuan revaluation and establishing a “fair price mode” for Chinese exports so coveted by the U.S. will come true, China will be ready for such a development, and ultimately will be able to benefit from this situation. Incidentally, it reminds one of the 36 Chinese stratagems saying that "if you want to catch something, first let it go" (the currency rate, for instance).
Olga Patseva, Editor of the Rough&Polished Asian Bureau in Shanghai
