Global Policy Forum

By David R. Francis

China's "yuan is wan."

The word play was made last week by an official of the National Association of Manufacturers. The NAM is one of more than 80 trade groups urging Congress and the Bush administration to press China to revalue its currency so its goods are less competitive in the United States.

A decade ago, the dollar value of the yuan on foreign-exchange markets would have been a minor issue in the US. China's economy just wasn't that important in the world picture. But China's enormous export success has made the yuan's price a hot issue today. "China is the world's greatest development story of the 21st century," declares Stephen Roach, chief economist at Morgan Stanley, a major New York investment banking firm. "Its emergence will not only benefit the 20 percent of the world that lives [there], but it will also benefit the 80 percent of us who do not." China's rapid economic growth - a fabulous 8 or 9 percent per year in real terms - has hung to a large degree on its roaring exports. In May, these had swelled to 37 percent above last year's levels. That, despite modest economic growth in the US, Europe, and Japan.

A major recent problem for Europe is that as the dollar falls against the euro and the British pound, the value of the Chinese yuan for Europeans also declines - making Europe's competitive position even worse. China's export growth has brought howls of protest from the US business community. "In the last 18 months, we have really begun to hear from our members," says Frank Vargo, a NAM economist. "China cannot continue for too long ... to depend on a rising trade surplus with the US to continue fueling its economic growth." As for Europe, Donald Straszheim, an economic consultant in Santa Monica, Calif., predicts a bigger "outcry" over the next six to 12 months. China has fixed or "pegged" its currency at about 8.28 yuan to the dollar since 1994. Some say the yuan is now too cheap.

Complaints from American business are now having an effect in Washington. When quizzed last Wednesday on CNBC about the yuan, Treasury Secretary John Snow said he was "encouraged from things we are hearing from China" that it is considering "widening the peg." If the range is widened, it would allow the yuan to appreciate somewhat. Earlier in the month, Federal Reserve Chairman Alan Greenspan told a congressional committee that China will have to go a step further and let the yuan "float" - that is, let its value be set by supply and demand in foreign-exchange markets. Mr. Snow has already suggested this move to Chinese authorities, Mr. Greenspan said.

Pegging is unsustainable, Greenspan explained, because it requires China to buy huge amounts of dollars on the foreign-exchange market. These are then invested mostly in US Treasuries or other dollar-denominated assets. China has been buying an average $600 million a day to support the dollar. The dollar inflow includes foreign investment - a huge $52.7 billion last year. In the past 12 months, China has added $100 billion to its foreign-exchange reserves, bringing the June total to a huge $346.5 billion, exceeded only by Japan's $526 billion in international reserves.

Mr. Vargo argues that China would be better off letting the yuan increase in value. Though this would reduce the growth in exports, it also would make imports cheaper and trim the additions to reserves. China's living standards would rise. Extra resources could be invested in China's infrastructure or other domestic needs. Worldwide, China's exports match its imports. But its exports last year to the US came to $125 billion and its imports from the US $22 billion. If China's exports to the US continue growing at the 20 percent rate of the past 20 years, the US trade deficit with China would increase to $330 billion in five years. "That won't happen," says Vargo. "This country will go protectionist."

Though "global pressure is continuing to mount," Mr. Straszheim doesn't expect China to revalue the yuan before 12 to 18 months. When it does happen, the yuan's value might rise 20 or 30 percent, Straszheim suggests. "How much is anybody's guess." And China might let its currency actually float by 2008, the year it hosts the Olympics. By then, "China wants to be regarded as a full-fledged member of the international economic community," he adds.

Straszheim travels to China next week to open a branch of his economic consulting business primarily serving corporations and institutional investors. "Years ago," he says, "I decided China was going to change the world economy." It presents American business with "a threat, or an opportunity, or both."

. In 1990, Japan accounted for 18 percent of all US imports. Today it has only 12.5 percent. China now has 9.3 percent of US imports - and is gaining fast. It ranks as America's third-largest trading partner.

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