Capital Commerce: From China, an economic fig leaf
On Capitol Hill words are often more important than deeds, and a fig leaf is sometimes just the cover needed to satisfy everyone. China, apparently, has finally absorbed these important lessons, as evidenced yesterday by its announcement of a 2 percent upward revaluation of the yuan against the dollar.
While the move could raise fears among U.S. consumers of higher prices for imports, it has generally won support among American policymakers and politicians because it helps domestic companies.
China's education in the ways of Washington has not been an easy one. After China's CNOOC, a Hong Kong-based public company, made a bid to acquire U.S. oil company Unocal last month, Congress reacted with opposition that was surprisingly fierce and included two bills in the House of Representatives, one of which would block the Treasury Department from even reviewing the transaction.
More potentially damaging for the Asian dragon was a bipartisan Senate bill that would enact punitive measures if China continued to keep its currency undervalued relative to the dollar.
Sens. Chuck Schumer and Lindsey Graham, authors of the bill, maintained that an artificially low exchange rate of the yuan against the dollar was giving Chinese companies an unfair trade advantage over American firms, and many economists agreed with them. The Senate bill is indicative of rising anxiety among lawmakers about China's growth and, according to some, its bald-faced mercantilism.
Because it needs China's help on security issues like North Korea and its nuclear intentions, the White House has shown unusual patience on the currency issue. But growing congressional ire was making that an untenable position.
Thus China's announcement, which involves a vague repegging of the yuan against a basket of currencies.
Said Schumer, perhaps the loudest of China's Capitol Hill critics, "This is a good first step, albeit a baby step. It is smaller than we had hoped, but to paraphrase the Chinese philosophers, a trip of a thousand miles can well begin with the first baby step."
And National Association of Manufacturers President John Engler: "China's new currency system offers the possibility for continued upward movement of the yuan in the coming weeks and months, and that is what we will be looking for."
But in fact, according to China watchers, the effect of China's revaluation will be minimal, at best. "At 2 percent versus the greenback, this yuan revaluation is unlikely to affect the U.S. trade deficit with China . . . or any of China's trade flows or economic conditions at all," wrote Carl Weinberg, chief economist at High Frequency Economics.
Does that matter? No, says Peter Morici, former chief economist of the U.S. International Trade Commission, now at the University of Maryland.
"China's new yuan policy is much like the old policy. The new policy will not substantially change U.S.-Chinese economic relations. This new policy will provide political cover for the Bush administration with Congress in continuing to accommodate China, but that is about all."