by Milton Ezrati, Lord Abbett
04.16.2012
Recently, China’s central bank governor, Zhou Xiaochuan, made comments that drew less attention than they deserve. First, he suggested that market forces would play a bigger role in setting the value of China’s currency, the yuan (or renminbi). He also mused that the yuan should rise further against the dollar and on foreign exchange markets generally. An announcement Saturday, April 14, by the People's Bank of China relating to increased flexibility in the trading band of the currency would appear to confirm Zhou's serious intent. There is room for two responses to this seemingly new Chinese positioning, one cynical and the other much more positive and hopeful.
On the cynical side, there is history. China has long strived to promote its exports by keeping its yuan cheap to the dollar and other major currencies. The global pricing advantage this policy has given Chinese goods has enabled the country famously to raise its share of global exports from nearly zero in the early 1990s, when it initiated the policy, to upwards of 12% more recently. The accompanying business and employment opportunities have propelled China to enviable aggregate growth rates throughout this time.
For these two-plus decades, China’s relentless adherence to this policy has led Beijing to resist all pressure for yuan appreciation, whether from by the United States, the European Union, or others. Beijing’s leadership set the tone in the early 1990s. In 1993, when under secretary of the Treasury, Larry Summers, demanded currency revaluation on behalf of President Clinton, Beijing, far from bowing, devalued the yuan within six months, and by a massive 60%. It then locked in the currency at that cheap price against the dollar. The move undercut pricing in most of the rest of Asia and ultimately contributed to the Asian crisis of 1997–98, referred to more commonly as the “Asian Contagion.” It was not until 2005 that Beijing allowed some upward movement in the yuan’s foreign-exchange value, and even then it kept tight control, allowing only frustratingly slow and slight appreciation.
Such a backdrop makes it easy to dismiss Governor Zhou’s comments as just so much rhetoric. After two decades of tight control, it is hard indeed to see China accepting much market influence on its currency. And since the yuan today remains 11% cheaper against the dollar than it was before China’s first grand devaluation, Governor Zhou’s speculation about whether market forces might raise its value further looks less insightful than obvious. The yuan’s modest depreciation so far this year raises still more questions about such a market-oriented commitment. Of course, market forces always move in uneven patterns, but it is nonetheless suspicious that, in 2010 and 2011, when Beijing aimed to slow the country’s growth rate, the yuan appreciated gradually, in its usual controlled way, but now that Beijing wants to promote growth, it has suddenly gone the other way. The pattern certainly speaks less to market forces than to Beijing’s usual currency management.
Still, cynicism aside, Governor Zhou’s comments may also contain a more positive, forward-looking aspect. Most encouraging is the link he made between the yuan’s value and China’s now-clear efforts at internal development. Beijing has come to recognize the vulnerabilities of export-oriented growth policy, especially during the 2008–09 global recession. Accordingly, it has begun to think increasingly about internal development as a second engine of growth, but also as a way to spread the benefits of economic development and avoid social unrest. As papers posted on China’s central bank and other government websites also make clear, Beijing realizes that the country cannot expect to increase its global export share over the next 20 years at the same rate it has in the past. China’s great success with its 2008 stimulus package has further encouraged the domestic development decision by proving the huge potential returns it offers. But Governor Zhou’s remarks are the first time Chinese officials have publically recognized that the shift requires a rise in the yuan’s foreign-exchange value.
Matters surely will unfold slowly. For the sake of jobs and incomes, China will continue to support its exports until it has achieved a critical mass of internal development, including a broader consumer sector, to support aggregate growth. But the governor’s comments should build conviction here in the United States and elsewhere in the world that China clearly plans to move along this path. Because broad-based domestic development will have more difficulty than exports in generating rapid growth, the picture offers reason to expect that China will exhibit slower growth going forward than it has in the past. But at the same time, the prospect promises increased opportunities for producers in the United States and elsewhere in the world to sell into a growing domestic Chinese market. It also promises that, in time, global trade patterns will find relief from the imbalances previously imposed by China’s once single-minded focus on exports.
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