As Chinese PM Wen Jiabao sat down with top eurozone officials and finance ministers, he was told China should let its currency find its natural worth. This follows recent US threats to impose tariffs on Chinese exports.
Chinese Prime Minister Wen Jiabao is in Belgium for the ASEM summit
One could say that the relationship between the US and China resembles that between a drug addict and his dealer. The Chinese sell valuable goods to the US and buy US government bonds with the revenues. This way, they help bankroll the US debt, allowing American consumers to buy more "Made in China" goods.
The result is that the US trade deficit with China doubles every four years. The US wants the yuan to appreciate so that Chinese goods become more expensive, imports to the US decrease and the trade deficit is reduced.
However, Xu Hongcai from the China Center for International Economic Exchanges says that there is no connection between the trade balance and the currency value.
"The prices for natural resources and work in China are low, not the currency," he explains. "International firms, including American ones, buy raw materials all over the world and have them processed in China before selling them everywhere. That’s why there’s a surplus in China – nothing to do with the currency."
Earlier this year, Beijing removed the yuan's peg to the dollar
The recent pressure from the US is due to the upcoming Congress elections, Xu adds. Unemployment is hovering at around 10 percent and the currency issue deflects from other domestic matters.
The US had high expectations when the Chinese Central Bank announced it would remove the yuan’s peg to the dollar in the summer. Since then, however, the yuan has only increased by 1.8 percent against the dollar.
Rolf Langhammer, the vice president of the Kiel Institute for the World Economy, says the Americans are naive to think China will allow more flexibility considering the unstable state of the global economy.
"Moreover, there is a third partner in play and you can’t make any deals with it – the euro. So long as the euro fluctuates against the dollar freely, the Chinese Central Bank cannot be sure how the euro-dollar exchange rate is likely to go," he points out.
Nor can it be sure of China’s chances on the European market even if the EU is China’s biggest trade partner, ahead of the US.
Economists warn against sudden changes
When the euro was weaker, making European exports to China cheaper and stimulating them, the Europeans looked upon the currency spat between the US and China rather quietly. Now, however, as the world's biggest economy falters and the European single currency strengthens, there is pressure on China from Europe too.
Analysts say it would be catastrophic for China's manufacturing sector if the yuan appreciated too fast
But economist Xu Hongcai doubts that the pressure will have much effect. "It would be tough on the manufacturing industry," he explains. "These companies work within very narrow margins. If the yuan appreciates too fast, many people’s livelihoods here will be threatened. This also concerns foreign firms here in China. They would have to look at other developing countries. Moving the production base would mean incurring further costs. And it would not help the US as firms would definitely not go there."
Rolf Langhammer from the Kiel Institute says that it could even be bad for the US. He explains that the system is very fragile and might not survive any shocks. He instead hopes that the yuan will slowly become a tradable currency thanks to its growing role on the Asian markets.
Author: Danhong Zhang / act
Editor: Thomas Baerthlein