Op-Ed Contributors

Inflated yuan a far-reaching fix

By Wang Guanyi (China Daily)
Updated: 2010-05-05 08:12

An appreciation of the renminbi has not been and will not be able to narrow down the US' trade deficit with China

Despite the fact that the White House has finally recognized that compromises with regard to China's exchange rate are more receptive than coercion, exemplified by last month's surprise visit by United States Treasury Secretary Timothy Geithner, a higher renminbi rate is still not the one-off solution for the US' predicaments.

Even though the Obama administration postponed a report that would label China a currency manipulator, the road of recovery for the US will be long and arduous and is hampered by its over-leveraged consumers.

With the US' midterm elections approaching, it was not difficult to understand why lawmakers on Capitol Hill desperately needed a scapegoat - aka China - to divert its discontent masses. And though President Hu Jintao's attendance recently at the Nuclear Security Summit in Washington was a positive sign, the US is deeply mired in economic problems.

True, the Federal Reserve and the Department of Treasury have together tightened credit expansion and they have saved the asset prices for the wealthy and retained jobs for Wall Streets elites. But the majority in the US is still suffering from the economic crisis.

The most recent unemployment rate in the US stood at a staggering 9.7 percent. Consumer spending is sluggish and the housing markets remain choppy. And deficits on both state and federal levels continue to climb as the burden on Social Security increases.

The controversial medical reform has already cost the Obama administration a lot of chips in Capitol Hill. Since columnist Paul Krugman's first shot at the renminbi pegging policy last December, the issue has caught the attentions of politicians such as US Senator Charles Schumer.

The US is running multilateral trade deficits with more than 90 countries and the effect of narrowing its overall trade deficit by relying on revaluing a single currency, the renminbi, is questionable.

The nature of the Sino-US trade imbalance is largely structural. Between 2005 to June 2008, the renminbi has appreciated approximately 21 percent against the dollar. Yet the US trade deficit with China has grown by $104 billion from 2004-2008. Although politically driven reports in the media have curried US voters in favor of a renminbi revaluation with the caveat that it will create jobs, the truth is that cheap imported goods are driven by demand from US consumers. A stronger renminbi will only divert demands to Mexico, India, Vietnam or whomever can produce cheaper goods.

The $7.2 billion deficit in March shows clearly that the Chinese economy is not export driven. The Sino-US trade imbalance worsened further by the US government's reluctance to export high technology to China. The United States has successfully boosted its economy through high-tech industries in recent decades, yet is still unwilling to share with China, one of its largest trading partners.