It was just over a year ago that Huang Fajing, 55, was struggling to keep his company afloat. The president of lighter manufacturer Wenzhou Rifeng Lighters Co., Huang was forced to send his roughly 500 workers home early as a result of the global economic crisis. He himself had little to do but watch television in his luxury apartment in the eastern Chinese industrial city of Wenzhou.
Given Huang's slim profit margins of no more than 5 percent, Huang has carefully fine-tuned the work performed by the young men and women in his factory to eliminate unnecessary movements. But the fact that he has survived the crisis at all is largely thanks to his government -- and the decision in the summer of 2008 to once again peg the exchange rate of the yuan to the US dollar.
The Crutch
Beijing uses this policy to ensure that the country's factories can continue to export their products at ever cheaper prices. Because the value of the dollar has declined sharply, the yuan has fallen along with it, losing up to 17 percent of its value against the euro in 2009. At the same time, this artificially low exchange rate serves as a crutch that enables the Chinese government to protect many of its export businesses against failure. It is the only reason why exports declined by only 1.2 percent in November 2009, relative to the same month a year earlier, allowing China to replace Germany as the world's top export economy.
Many in the West see the rising economic power as an enormous engine of growth that is helping to lift the rest of the world out of the crisis. The government in Beijing has jump-started the domestic economy with a gigantic economic stimulus package worth four trillion yuan, or about €400 billion ($580 billion), which has led to investments in road, railway and airport construction throughout the country. Generous tax rebates to stimulate consumption, particularly of big-ticket items like cars, were also part of the package.
But China, with its enormous export economy, has in fact expanded global imbalances with its aggressive exchange rate strategy -- the same kind of imbalances that were partly responsible for the most recent financial crisis and, as a result, ought to be corrected.
China also risks triggering new, long-term trade conflicts, particularly with its neighbors. Since the beginning of the economic crisis, China has been diverting some of its exports to neighboring countries and away from Europe and the US, where sales have declined.
Series of Dumping Complaints
Some of its neighbors have already taken defensive measures. Vietnam recently devalued its currency, the dong, by 5 percent, making imports more expensive and protecting the domestic industry from a flood of Chinese goods. India has submitted a series of dumping complaints to the World Trade Organization (WTO), including one involving cheap imported paper from China. And Indonesia has sought to protect itself against cheap Chinese nails by imposing protective tariffs.
Western companies, on the other hand, are still relatively unconcerned about Beijing's exchange rate policy -- with good reason. Manufacturers that produce inexpensive shoes, electric drills or computers in China for sale in their domestic markets have no reason to complain. And many German businesses, particularly machine manufacturers, can still sell their products in the realm of the cheap yuan, because their Chinese customers are often willing to pay higher prices for German quality.
Nevertheless, there is growing opposition in Europe and the United States to a policy whereby China is trying to export its way to economic health, essentially at the expense of the rest of the world. Throughout the country, Chinese provincial officials are vying to expand local state-owned factories and build new ones. The steel industry alone has increased its capacity by about a third in the space of only two years.
Duties on Chinese Tires
As a result, the world must brace itself for a new wave of cheap Chinese-made goods. "Unfortunately, we will see a lot more dumping complaints against China in the second half of 2010," predicts Jörg Wuttke, president of the European Union Chamber of Commerce in Beijing.
In late December, the EU imposed a 64.3 percent anti-dumping tariff on Chinese metal wire used in the auto industry, and the US is likewise protecting itself by imposing new duties on cheap Chinese tires and steel pipes. Beijing threatens to retaliate by imposing symbolic tariffs on American chickens and cars.
Ironically, China, with its policy of keeping the yuan artificially undervalued will ultimately harm itself more than anyone -- not unlike a rehab patient reaching desperately for more drugs. In order to keep the yuan down, the Chinese central bank must constantly buy up dollars. As a result, the country has amassed the world's largest foreign currency reserves, worth $2.3 trillion. China invests about two-thirds of its reserves in American currency, primarily in US treasury bonds. But as the dollar continues to fall, the value of this investment declines along with it.
China, however, has so far refused to enter into a debate over their economy's chronic dependence on manipulated exchange rates. At a meeting with EU representatives in Nanjing, Chinese Premier Wen Jiabao dismissed as "unfair" a politely worded request that he reduce the value of his currency against the dollar to rein in the flood of exports. Even US President Barack Obama, during his recent visit to China, was reluctant to be appropriately forceful in addressing the politically taboo subject.
Indefinite Exploitation
The issue seems to have become an embarrassment to Beijing's leaders, particularly given their declared goal of balancing China's current accounts with other countries by the end of 2010.
This aim was the work of men like Yu Yongding, 61. A former advisor to the Chinese central bank, Yu now has an office on the 15th floor of the Academy of Social Sciences in Beijing, a respected government think tank. Having been a leading visionary for a world power, Yu now finds himself having to defend his life's work.
He celebrated his greatest triumph on July 21, 2005, when the People's Bank of China, as the Chinese central bank is officially called, slightly appreciated the yuan against the dollar, while simultaneously removing the currency's dollar peg. From then on, instead of being firmly pegged to the dollar, the yuan fluctuated within fixed parameters against a currency basket made up of several different currencies.
This led to a 22-percent increase in the yuan's value against the dollar by November 2008. Reformers like Yu, imagining that China was on the verge of liberating itself from a dependency on low-wage industry, celebrated the course correction as a symbolic beginning. They also believed that a higher-valued yuan would reduce the cost of imports to China, stimulate private consumption and enable the People's Republic to join the ranks of high-tech nations in the long term. "We cannot allow the United States to indefinitely exploit us as a low-wage country," says Yu.
The Bubble Could Burst
During the course of the global crisis, though, the reformers soon found themselves on the defensive. One of those reformers is Zhou Xiaochuan, the governor of the central bank. Zhou sets the yuan's exchange rate, practically at the instruction of the cabinet, which is intent on doing whatever it can to boost exports to achieve its goal of increasing gross domestic product by 8 percent. Initial forecasts indicate that Chinese GDP actually grew even more in 2009 -- as much as 9 percent.
But with his rigid exchange rate regime, Zhou is also fueling China's enormous economic bubble. Some of the foreign currency he is forced to continually extract from the market to bolster the yuan is subsequently re-injected into the monetary cycle in the form of increased liquidity. Low interest loans from Chinese banks are indirectly fueling widespread speculation in stocks and real estate.
Were the US to suddenly raise interest rates, the bubble could burst. Indeed, by pegging the yuan to the dollar, China ultimately makes itself dependent on US monetary policy. "No one knows how much lower the dollar will go," says economist Lin Jiang of the Sun Yat-Sen University in Guangzhou, "or if the US will suddenly end its policy of easy money."
But many of his fellow Chinese, on the contrary, see the dollar peg as a symbol of national sovereignty instead of distasteful dependence. "The more the West urges China to appreciate the yuan, the less the government will respond," says former central bank advisor Yu.
Huang, the lighter manufacturer, is pinning his hopes on the yuan remaining undervalued. "If Beijing appreciates the currency by more than 1.5 percent," he says, "I will go out of business."
http://www.spiegel.de/international/world/0,1518,671310,00.html
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