As China smugly adapts to its role as the second biggest economy in the world, the revaluation of its currency, the yuan, seems inevitable. The country ended the Yuan's ten-year peg to the dollar this July, and the world has been awaiting further appreciation of the Yuan with much anticipation.
The U.S. National Association of Manufacturers currently estimates the Yuan to be undervalued by 40 percent. It has been pressuring China into appreciating its currency to stabilize bilateral trade deficits - which in 2004 topped $162 billion. As China's export market continues to profit from the low value of the yuan, U.S. manufacturers and workers are increasingly losing jobs to their Chinese counterparts.
Along with the U.S., Japan and Thailand are pushing for reform of the Yuan after continuously trying to appreciate their own currencies against the dollar.
As China is increasingly forced to undertake economic reforms to adapt to the international market, it is not clear to what extent foreign demands for an appreciation of the Yuan will really yield positive results. With a closer look, it becomes apparently that China itself might have the most to gain through appreciation.
Secretary of Treasury John Snow adopted an unexpectedly lax approach in his talks when visiting China this October. He emphasized the importance for China of creating an economic market less dependent on exports and more open to foreign investment. But Snow is willing to extend the deadline for China. Snow has also put an end to the speculation that the U.S. will charge China of currency manipulation in its biannual study of foreign exchange practices later this year.
There are a couple of reasons for this change in strategy. China is one of the main buyers of U.S. government bonds and is helping to keep U.S. interest rates low. If it appreciates, China will cut back on its purchases, causing interest yields on Treasury and mortgage-backed securities to soar.
Though U.S. manufacturers have invariably been suffering blows in profit through losing big contracts and jobs to China, there is no guarantee that these jobs will return to the U.S. They might go to other low-wage countries instead.
A stronger yuan will increase already high oil prices. China is currently amongst the biggest importers of oil and a higher value of the yuan will allow China to purchase even more oil for lower prices, as oil prices are set in dollars in worldwide.
Though a revaluation of the yuan might thus not be as advantageous for the U.S. as initially perceived, China itself will largely profit from this economic reform.
In the short-run, immediately increasing the value of the yuan will trigger unemployment and curtail growth in China's export-based economy. Many Chinese manufactures might lose foreign contracts to competition in other low-wage countries.
But in the long term, an appreciation of the yuan will help certain business sectors of the country. China's automakers for instance rely strongly on imported parts, and a stronger yuan will decrease their cost of production. A stronger yuan will also decrease China's economic dependence on exports and encourage investment in services improving China's infrastructure, such as electricity, food and education. It will help China as it embarks on its path towards true financial modernization, encouraging reforms in its banking and investment system.
China might soon be the number one economy in the world. A stronger yuan will enable China to be stable enough to lead when that time comes.
Shrutih Tewarie is a freshman who has not yet declared a major.
