Bigger Yuan Revaluation Would Have Sizeable Effect
On June 19, China said it would let the yuan appreciate, after being tied as tight as an anchor to the dollar since 2008. The policy gave China a boost politically, but it hasn’t had any real effect economically, because the yuan has appreciated just 0.8% since them.
But William Cline, a veteran international economist at the Peterson Institute for International Economics, estimates that a 10% rise in the inflation-adjusted value of the yuan against the currencies of its trading partners would have substantial economic effects. It would reduce China’s current account surplus, which the International Monetary Fund estimates will hit $335billion in 2010 — by $170 billion to $250 billion, he estimates.
Looking at the U.S., Mr. Cline figures, the change in the value of the yuan would reduce by $22 billion to $63 billion the U.S. current account deficit, which the IMF estimates will hit $487 billion this year.
Different economists reach different conclusions, of course. Skeptics doubt that a yuan appreciation would have much effect on the U.S. because imports from China would be replaced from imports from elsewhere around the world.
Mr. Cline acknowledges that the last time the yuan appreciated significantly, by 18.6% between 2005 and 2008, the U.S. trade deficit with China actually widened. (He says it takes time for the appreciation to affect the trade numbers.)
But the importance of Mr. Cline’s numbers may be more political than economic. Democratic lawmakers continue to be unhappy about China’s currency policies and disappointed that the Obama administration hasn’t pushed Beijing harder. The PIIE has long been known as a free-trade advocate and their estimates have become important parts of the debate over trade, giving ammunition to free traders.
Mr. Cline’s estimates could play such a role in a coming legislative fight, but this time as a weapon for trade hardliners. Lawmakers may latch on to the PIIE numbers to demonstrate they aren’t being protectionist.
Congressional aides say any legislation to boost U.S. manufacturing could become a vehicle to attach crack-down-on-Beijing rules.
China Real Time
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