China Backed Into Corner Over Yuan

Backlash of the United States large trade deficit has produced an unusual result in Congress- bipartisan cooperation. With a June deadline looming, Congress will soon begin debate on a bill threatening to slap 27.5% tariffs on Chinese imports unless the Yuan is allowed to appreciate against the U.S. dollar. The proposed bill would grant China six months to adjust the value of its currency or face stiff tariffs on its exports to the United States. There is strong sentiment in Congress, both among Democrats and Republicans, to act in order to stem the continuous flow of manufacturing jobs to cheaper destinations overseas.

Last year the United States had a $162 billion trade deficit with China and it is expected to increase further this coming year. Chinese authorities are reluctant to move on the Yuan to maintain its cheap labor market as a catalyst for foreign investment. As China reforms itself into a market-oriented economy, inefficient state-owned businesses are being transferred into private hands. Already faced with chronically high unemployment in rural areas, China must be able to provide employment to individuals losing their jobs as a result of transition toward a more efficient economy of private ownership.

Speculation began to grow last year about an imminent revaluation of the Chinese Yuan, but no action has occurred so far to realign the undervalued currency. Intense political and media action about the issues has backed China into a corner over the issue. At the end of last year many believed China would take the initial step of increasing the Yuan’s value by about 5%, but with the increasing attention recently brought around America’s large trade deficit it appears a small, one-time revaluation will do little to appease legislatives in Washington.

Chinese financial authorities are scheduled to meet with Treasury Department officials next week. Among the topics surely to be discussed will be the possible revaluation of the Yuan. It is difficult to guess whether this is just another delaying tactic or if a revaluation is imminent.

  1. No comments yet.

Please copy the string wq6yVd to the field below: