Revaluing the Yuan

Since Obama planned his trip to China there has been speculation as to whether or not he'd press China to revalue the Yuan. Rumors of revaluation pop up at least once a year, and occassionally the rumors are true (when I first moved to China at the end of 2005, the exchange rate was a little more than 8 to the dollar; when I left it was about 6.8 to the dollar--I should've saved more money). The value the US would like to see is probably along the lines of the standard of living, which would be around 2-3RMB to the dollar, but that is unlikely to happen for a long time.

Revaluing the Yuan is a touchy subject in China--many view it as pressure from Western powers to slow the Chinese economy or just a plot to destroy the economy (I had more than a few students write essays about this subject with little to no supporting details). Many Americans believe that a stronger Yuan will help the American economy, while many Chinese believe that a stronger Yuan will hurt the Chinese economy.

In the short term, a revalued Yuan won't do much of anything. It will improve the Chinese buying power of non-Chinese products, which are extremely expensive when considering the standard of living in China. But, it will also make Chinese products more expensive abroad, which could lead to people spending less on Chinese-made products. It is not likely to make Chinese products more expensive in China, which is the real fear of the working class there.

The fear that the Chinese government has is that a revalued Yuan will force foreign companies to move to cheaper countries. Some companies have already done so, but it was more about the rise of minimum wage in areas like Shenzhen (minimum wage is 1000RMB per month). Most companies can't move to countries with cheaper labor because those countries don't have the infrastructure or number of laborers that China has. Also, it costs money to build a factory and train new workers. The exodus of manufacturing jobs from China will not happen quickly--it's more likely that it may happen gradually over the next 10 or 20 years. This gives Chinese companies ample time to adapt to the changes.

The greatest fear should come from American businesses. With a stronger Yuan, Chinese businesses will have more money to spend abroad, which they would happily spend on acquiring foreign businesses and product lines (such as Hummer). Acquiring such companies and product lines will improve the image and quality of Chinese products abroad. And, Chinese businesses are not likely to keep manufacturing units in the US, thus costing more jobs in the American economy.