The Yuan Also Rises

President Obama stated recently that he will take a ¡°tough stance¡± against the valuation of the yuan and that it will be a priority topic in international strategic economic development discussions. Obama said in a Feb. 9 interview with Bloomberg BusinessWeek that China¡¯s ¡°currency policies are impeding the rebalancing that¡¯s necessary¡± in the global economy, and also is leading to a bubble in the Chinese economy. The argument, bordering on statement, is the weak Yuan creates a huge trade surplus for China and an imbalance in international trade. Many people in the international community, particularly in the United States, feel that a reevaluation would likely accelerate the growth of their exports to China.

Growing up, whenever I did not get along with another child or a sibling, my mother would always say to me, ¡°maybe it is you who needs to change Quinn. Have you done everything you can to make this work?¡±

I think it is time Mom has a sit down with Barrack. I envision the lecture going something like this (in a wise motherly voice) , ¡°You cannot control other people Barrack. Is there anyway you can change yourself to get along better with China? Are there any newly instituted or significant incentives to encourage American manufacturers to come back home?¡±

Today, the United States is not a desirable place to build new factories and manufacturing plants. The United States invents a lot of the technologies produced but is an extremely small player in global production. Sure, there are the labor cost issues, but for many of these products require the same high skilled and high paid engineers and managers that can be found in any factory in the world. You can also offset the labor costs with the cost of shipment.

Why is the United States losing out on production output? Forget foreign exchange rates. It is not materials; they cost the same everywhere. If you go down the list, everything seems to match up pretty well, EXCEPT TAX POLICIES AND SUBSIDIES.

The Yuan will eventually be revalued. I believe China is currently keeping the value low to stem job loss and they are most likely torn between a one off increase or a gradual increase, fearing the gradual will bring fast cash into an already booming economy and create more headaches for a government in the midst of fighting off inflation.

Will the increased value of the Yuan bring manufacturers back to the US? Absolutely not. You have already scared them away. And all this talk about taxing American companies foreign income (which gets no press by the way), let¡¯s not lose our corporations as well.

1 Comment

  • 1.Jen  |  March 11, 2010, 8:49 am

    Your understanding of the Chinese political and economic realities are impressive, Quinn. I agree that the RMB revaluation is imminent, with the only debate being over how much and how fast. More specifically, I think the delays are due to discussions between government agencies and corporations in order to 1) convince corporations that stand to suffer a loss in their profit margin that the benefits of revaluation outweigh the negatives, and 2) calculate exactly how much adjustment the corporations and overall economy can tolerate.

    I find such discussions to be a fascinating aspect of Chinese politics, in that the government and corporations depend heavily on each other and openly negotiate the best route to revaluation. Unlike in China, I sense the US government and corporations are more apt to take each other for granted and/or maintain an air of secrecy and detachement even when working together on a policy, hence the more open disagreements. Oh well, what can you do?

    Lastly, let's not forget that despite all the political posturing, China is not going to revalue its currency because of the so-called pressure from the Obama administration; it will do so because doing so is in its own best interest. In an international climate thick with mistrust as players balance for power, corporations must navigate those turbulances carefully and seize opportunities when they come, not only for their own interests but also to be the stable foundations on which states and people's livelihoods are built. <insert obligatory Lehman plug, since you neglected to do so :)>

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