China's currency issue with the United States

By Pat Welsh, China Insight contributor 

The denomination of China’s currency is the  renminbi ( literally translated as “Peoples’ currency”).  The major unit of the renminbi is the yuan. Many Americans believe that the yuan should strengthen further against our dollar.  They cite as evidence the fact that the value of China exports to this country far exceeds that of our exports to China. In 2012, this deficit reached US$315 billion, much of which was because many of our products were priced too expensively in China. Also cited is that in dollar terms, the wages of Chinese workers are extremely low.

 

My own experience is that many common Chinese daily use products are about one-fifth to one-seventh the price of the same goods in this country in terms of the US dollar, well enabling China’s population to purchase what it needs.

These contentions are largely true and I can fully understand the argument for some further strengthening of the yuan against the dollar, yet they leave open the question of just how much further China’s currency should be allowed to strengthen against ours?  

How does China set its exchange rate? China sets the value of the yuan to always equal a set amount of a basket of currencies, which includes the dollar. In other words, China pegs its currency to the dollar using a fixed exchange rate. When the dollar loses too much value, China buys dollars through U.S. Treasury borrowings to support the dollar. In this way, the yuan's value is always within its targeted range. As long as the yuan's value is low enough, China's goods will remain cheaper in comparison. 

What the trade deficit means to us and the Chinese: 

1.       For us China’s trade surplus with this country has been so successful that, in order to avoid inflation at home, most U.S. dollars earned are invested back here in the United States, most of which is their purchasing of our national debt mentioned above. This has played a significant role in enabling American borrowers, including our government, to borrow at extremely low rates of interest. 

2.       For Chinese investors, as the yuan strengthens against the dollar, the Chinese investor is incurring significant foreign exchange losses. For example, if in 2007 a Chinese investor had taken CN¥1000 and converted it to U.S. dollars for an investment here, that investment today would be worth only about CN¥760. This is another motivation for China to keep its USD earnings here in the United States rather than convert it back into renminbi. It is also a reason why China has been slow to let the yuan strengthen against the dollar. 

3.       Today’s stronger yuan means that American goods are less expensive in the eyes of the Chinese. On the other hand, the weaker yuan of previous years was a boon for the American traveler in China and importers of Chinese goods. Today, as the value of the China’s yuan continues to strengthen against the dollar and other currencies, the prices of Chinese goods have become less competitive in world markets. In January 2003, US$1.00 bought CN¥8.26 in China. Today in mid-August 2013, US$1.00 only buys CN¥6.19. This has resulted in higher levels of layoffs and greater unemployment in China.  

4.       There is no doubt that a weak yuan has played a role in the loss of some manufacturing jobs here. Fortunately, China’s own bureaucracy, inflation and higher transportation costs have compelled many American firms to rethink their former strategy and bring these jobs back home.         

The question still remains then, just how much stronger would we like to see the yuan become? 

Some legislators have been trying to enact tariffs and trade legislation aimed at forcing China to strengthen its yuan even further. However, should this actually happen and the yuan becomes too strong, U.S. consumers would find themselves paying higher prices for both Chinese and "Made in America" goods. As China's investment in our debt becomes smaller, the United States would then have to allow our interest rates to rise here in order to attract other lenders to replace the lost money lent to us by China. This, in turn, is likely to threaten our recovery from the current recession. This is why I believe that it's unlikely that too much will be done here to reduce the trade deficit. This is also why we would want to have the yuan not too much stronger. Let’s face it, most people would rather pay as little as possible for computers, electronics, tools and clothing, etc., even if it means other Americans lose their jobs.

 

About Pat Welsh

Welsh’s interest in China and the Chinese language was piqued at the tender age of 5 by missionary “movies” shown by priests in his Chicago neighborhood. The impactful “movies” were, as Welsh later realized, documentaries of the Shanghai and Nanjing Massacres in China. Why would the priests think these could motivate kids to missionary work? But that’s another story … 

Between 1947 and 1972, Welsh’s interest in world affairs grew. He had learned early that if he knew the language of a country, he could learn much more about it than merely relying on English resources. He focused on China because growing up in Chicago, he had met Chinese from China’s east coast. From them he learned various Chinese dialects: Cantonese, Toisanese, Mandarin, Shanghainese, Taiwanese and Fukien. When his family moved to Lake Forest, Ill., in 1948, he found two Chinese language-learning books at the library. These provided him a fundamental understanding of Chinese syntax and characters. 

After getting a Master’s degree in Oriental Languages and Literature at the University of Kansas in 1972, he began his Ph.D. program at the University of Michigan. This course of study further convinced Welsh the beauty and advantage of using Chinese- and Japanese-language resources to study the history, politics, economics and culture of those countries. From 1975-1985, Welsh worked in the Asia-Pacific Division of the Northern Trust Bank in Chicago where the payoff for his Asian studies came into fruition. He worked not only with Taiwanese banks, he also developed a relationship with the Bank of China and its Hong Kong subsidiary, the Nanyang Commercial Bank. He also worked with accounts in Australia, India, Japan, Korea, New Zealand, Pakistan and Thailand.  

After Mao’s death in 1976, the disastrous Cultural Revolution that devastated China’s economy came to an end. Hua Guofeng restored Deng Xiaoping and others to power in 1977 and the new leadership opened itself up to the West, motivated by a desire to bring China into the 20th century, promising a stable China-United States relationship. Through his work at the Northern Trust, Welsh met many members of China’s new leadership who wanted Western firms to feel comfortable about working with them. Welsh’s command of Chinese made him stand out. Chinese officials visiting the bank took an interest in him, one of whom was Li Xiang, minister of Foreign Trade. After giving an informative and well-received presentation in Chinese in Chicago to a delegation from the People’s Bank of China, Welsh met Pu Ming, chairman of the Bank of China who was also a member of the China’s State Council. Pu took him under his wing. Later in China, Welsh further impressed Pu by speaking a dialect close to Pu’s hometown. After this incident Welsh, in his own words, “could do no wrong” in Pu’s eyes! Another influential contact was Wang Guangmei, the very learned wife of Liu Shaoqi. Liu had been the head of the communist party from 1961-1966. Through her, Welsh met other high-ranking officials in the economic and foreign trade arenas. 

By invitation of the Georgia State Department, Welsh taught Chinese in Georgia high schools from the 1986 to his retirement in 2007.

Welsh credits his insight on how decisions were made in China and what China’s priorities were as times changed to his relationships with the Chinese officials and to the friendships of colleagues he met while teaching. 

 

 

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