President Barack Obama had an intensive discussion about the yuan with Wen Jiabao Sept. 23 on the sidelines of the U.N. General Assembly meeting in New York, if White House officials are to be believed. In response, the Chinese premier reportedly assured Obama that China will press ahead with currency reforms, thereby delaying the disagreement until their next meeting. In reality, Washington remains naive to expect any significant rise in the value of the yuan, and Beijing remains disingenuous in offering such a prospect in the first place.
Beijing does not doubt that a re-evaluation of the yuan upward is in China's long-term interest. As Chinese economists continually warn, their economy is way too dependent on exports and fixed investment and not enough on domestic consumption. The Chinese people consume around the same quantity of goods and services as France, a country with one-twentieth the population. Because China imports around half of its consumer products from overseas, making imports cheaper through major reform would be one way of boosting the purchasing power of its citizens.
Yet, since the announcement in June that China would eag its currency peg, the yuan has risen approximately 1.8 percent against the dollar and actually fell against a basket of major international currencies prior to this week. For Obama, the issue is ostensibly about creating export manufacturing jobs for Americans. But the president should be aware that Beijing is even more determined to ensure that its currency remains artificially low.
The first reason, though this is not a viewpoint widely held by the country's economists, is that a large number of Chinese Communist Party officials think that the United States is deliberately attempting to orchestrate a Chinese slowdown by pushing for the re-evaluation of the yuan. These officials point to the 1980s, when the U.S. Congress was making similar demands on Japan to revalue the yen upward. As the U.S. dollar fell from 240 yen to 160 yen over two years, Japanese growth subsequently slowed. Tokyo responded by boosting government spending and lowering interest rates, leading to the rise of a real estate bubble that eventually burst and is still haunting the Japanese economy today.
China now has its own real estate bubbles, the result of record government spending and bank lending in 2009. A recent study conducted by the People's Bank of China estimated that around a quarter of homes purchased in the first six months of 2010 in Beijing were bought for investment and speculation purposes. In "hot" regions such as Tongzhou district and Wangjing area, the figure is closer to 50 percent. Beijing is already committed to deflating these bubbles before they pop -- meaning that its appetite for any further slowdown in exports is close to nil.
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