A yuan yawn
DECADES FROM NOW, when historians are sorting through what became of the U.S. economy, they will surely begin their investigations with a meeting that took place on the late afternoon of July 21, 2005, in a conference room at the headquarters of the People’s Bank of China in Beijing.
Or maybe not.
The bank, in an announcement last week before representatives of the world’s largest banks, revalued China’s currency, the yuan, causing it to rise in value by about 2% against the dollar.
Almost immediately, doomsday scenarios and best-case analyses were competing for headlines: Mortgage rates would go up (because the Chinese would buy fewer U.S. bonds). American manufacturers would do better (because their products would now be cheaper in China). Toys would cost more (because so many of them are made in China).
All of this may be partly true, but probably overblown. There are many other factors -- the disparity in labor costs, for one -- driving the commercial relationship between the U.S. and Beijing, yet the blame-China crowd in Washington has been obsessing over the currency peg, which not long ago Washington liked. So Beijing has done what it has learned to do so well -- cater to the American marketplace.
If economics is the dismal science, then the study of exchange rates and their attendant effects is enough to put it on suicide watch.
It is pointless to hypothesize about the effects of the revalued yuan, in part because it is unclear how far China is willing to take its new policy. Until we know that, all is speculation. In the meantime, two points deserve mention.
First, the change is significant not in its details but for its mere existence. For more than a decade, China set the value of the yuan rigidly at 8.28 per dollar, in part to give its economy some stability. From now on, the yuan’s value will be set against a “basket” of currencies, and central bank officials have said they will allow it to fluctuate by 0.3% a day. This is a sign that China is willing to become more integrated into the global economy.
Which leads to the second point: Be careful what you wish for. Now that China is officially on the record with a more flexible currency policy, U.S. politicians may find it harder to complain when China is, well, more flexible -- allowing the yuan to rise or fall in response to economic conditions, and working to manage those conditions to its benefit.
Of course, China will have to be careful too, as its new policy will undoubtedly attract currency speculators.
Last week’s revaluation may be the beginning of a gradual and historic shift in global economic power, with China asserting itself more forcefully and the United States in more of a reactive role. Then again, changes in currency policy are hardly uncommon, and the U.S. economy is remarkably proficient at responding to them. Check back in a few decades.
