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Wednesday, October 12, 2005

Can China Risk Revaluation?

Here's the view of Qu Hongbin, chief China economist for the Hongkong and Shanghai Banking Corporation who says China can't revalue its currency even if it wants to:

China can't move further on the yuan, by Qu Hongbin, Commentary, International Herald Tribune: John Snow, the U.S. treasury secretary, visits Beijing this week to talk about what China can do to help cut a U.S. current-account deficit ... For months, the United States pressed China to revalue... the yuan, and China finally responded on July 21 ... This has involved, so far, a revaluation of about 2.4 percent against the U.S. dollar. When he arrived in Shanghai on Tuesday, Snow called for more. But China can't deliver, whether it wants to or not. ... The total value of Chinese exports is huge ... and set to be even higher this year. ... That has many in the United States worried that China is using a cheap currency to undermine U.S. competitiveness, while increasing U.S. indebtedness and its current-account deficit. This view assumes that China's exports come from China. But it's not so simple. ... official figures suggest that the value of imported components is as much as 80 percent of the total value of the processed exports. A Japanese-owned factory in China making notebook computers ... will buy Intel chips from the United States, screens from South Korea and other components from its parent in Japan for final assembly and processing. The finished product has a total value of perhaps $1,000, which is recorded as an export from China to the United States. But the imported parts and components may represent up to 80 percent of the computer's value. This distorts China's export value immensely. Looked at from a value-added point of view, China's level of exports wouldn't be at all exceptional. How China trades with the rest of the world can only be determined by its comparative advantage - its abundant labor supply. With at least 200 million surplus rural workers hitting the urban job market, ... China is well positioned to participate in the labor-intensive stages of production for almost all industries. ... The bottom line is that China is effectively exporting labor services ... The value added in China - about 20 percent once double accounting has been stripped out - represents the cost of labor. Maintaining this channel to expand the export of labor services is crucial to sustaining China's development, which centers on shifting rural surplus labor into industrial and tertiary sectors. Given the sheer size of its surplus labor force, China has no choice but to expand the export of its labor services to create jobs. There's only one conclusion: Continuing to bolster labor-intensive production and exports is the only viable means for China to absorb its surplus labor and improve rural living standards. To do so, China must keep the yuan's effective exchange rate competitive for the foreseeable future.

    Posted by on Wednesday, October 12, 2005 at 03:50 AM in China, Economics, International Trade | Permalink  TrackBack (0)  Comments (5)

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