Change is necessary for China

October 19, 2007
By: Dan Davis

Everyone needs a bogeyman. Superman has Lex Luthor. Conservatives in the U.S. have the left-wing media; liberals have the right-wing conspiracy. The Boston Red Sox have the New York Yankees.

Sometimes it"s just easier getting through life when you can focus your negative energies on one particular entityeven if in some cases it might not be that well-defined.

Many metal fabricators and formers have looked at China that way for several years. Factories have shut down in the U.S., and the trade deficit with China has risen dramatically simultaneously. Job shops constantly are told to beat this world price, and many of them believe the source of that unbelievably favorable job bid has to originate in China.

Many believe that allowing the Chinese yuan to be valued according to true market forces, rather than being reigned in artificially to avoid explosive growth, would help U.S. metal fabricators and formers. That may not be the case, according to some economists.

They argue that a free-floating yuan would make Chinese goods more expensive—which is exactly what U.S. manufacturers want to hear. For the record, the yuan has gained less than 4 percent this year versus the U.S. dollar, which is substantially less than the 11 percent increase of the Indian rupee.

Jonathan Anderson, chief Asian economist, UBS, wrote in the July/August 2007 issue of the Far Eastern Economic Review that a change in the valuation of the yuan would make Chinese exports more expensive without a doubt, but the price jump likely wouldn"t affect China"s export numbers. The Chinese have been passing along price increases consistently over the past couple of years as the country"s manufacturers have had to deal with rising wages, increasing at a 10 percent to 15 percent annual clip. Meanwhile the trade deficit between China and the U.S. actually has risen. Anderson theorizes this would continue even after an adjustment away from the manipulation.

As for manufacturing job loss in the U.S., Anderson contends that its part of a natural progression. He suggests that the U.S. economy has shed manufacturing jobs at a straight-line pace of 4 percent per decade for the past several decades.

Ironically, Anderson wrote that China should revisit its currency practices for its own good. Simply put, the government hasn"t done a real good job of stopping the incredible flow of investment money targeted at industrial development. It"s one of the reasons that China has emerged as an exporter of items such as steel despite common sense suggesting that infrastructure projects under way domestically would consume all of the industrial raw materials the country could pull together. China needs to avoid the bust associated with this growing bubble.

Left to its own devices, however, the Chinese government has failed to slow the flow of industrial investment.

Faster revaluation is now the only real adjustment tool available to the Chinese authorities. The glory of using the currency is that it helps reduce the trade balance, lowers the incentive for further excess industrial capacity creation, acts in a targeted way against the most energy-intensive and polluting sectors, and redirects spending towards higher imports from China"s Asian neighbors, Anderson wrote.

China"s President Hu Jintao promised talks about gradual change in the way the country handles the yuan in his address to the Communist Party on Oct. 16. The country finally might take actionsfor its own good, not in the name of better relations with the U.S.

In the end, does it really matter what the motivation is?

Dan Davis

Dan Davis

FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-227-8281