The Chinese news agency Xinhua reported that that the yuan, also known as the renminbi, hit 6.7718 to the dollar on Monday. That's a 0.8% increase since China announced on June 19 that it was ending the yuan's peg to the dollar and allowing it to appreciate. The Chinese currency isn't freely traded, but is bought and sold by the People's Bank of China to keep it within a narrow trading band.
No Quick Fix from Yuan Appreciation
The yuan appreciation is likely to be "quite gradual," says Philip I. Levy, resident scholar at the American Enterprise Institute in Washington, D.C. "It's not going to be the quick fix for the American economy, and it's not going to be the kind of thing where all of a sudden in the second half of this year they run a trade deficit, or even balance," Levy says.
The Beijing government reported on Saturday that its trade surplus rose by $20 billion in June, which is larger than May's surplus of $19.5 billion, thanks largely to increased exports.
While it's too early for the new yuan policy to have affected those trade figures, the increasing Chinese surplus is likely to fuel demands in the U.S. to take retaliatory measures to compensate for the undervalued yuan. Sen. Charles Schumer (D-N.Y.) has a bill pending before Congress that would force the government to impose tariffs on Chinese goods if the yuan remains undervalued.
The U.S. Treasury Department issued a report last week concluding that the yuan remains undervalued. Treasury Secretary Timothy Geithner said that "what matters is how far and how fast the renminbi appreciates," but he stopped short of labeling China a currency manipulator as he did at his confirmation hearings last year. The next Treasury report on the yuan is due in October.
Yuan Policy Hopes Are "Wishful Thinking"
Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, says hopes that the yuan policy will redress the trade imbalance are "wishful thinking."
"At the end of the day, the trade balance is not really about currency prices, it's about consumption, savings and investment patterns," he says.
Chandler says the currency market is estimating that China will allow the yuan to appreciate only 1.7% in the next year. That's down from the 6% to 7% annual appreciation the Chinese allowed from 2005 until 2008, when the currency was fixed against the U.S. dollar.
Chandler notes that while the yuan appreciated 21% in that three-year period, at the end of 2008 China had a bigger trade surplus than in 2005 before the appreciation started.
China's Share of Asia Trade Has Grown
Levy points out that U.S. imports from Asia have held relatively steady over the past 10 to 15 years. What's happened is that China's share has grown substantially, but that has come at the expense of other Asian countries like Malaysia.
He says that if China is forced to make a rapid appreciation of the yuan, that would merely force factories to open up in cheaper countries like Vietnam, India and Brazil, not in the U.S. "There's often a supposition that's driving a lot of this debate which is: If it's not produced in China, then it will be produced here," Levy says. "That's not really the way things work."
He says that the Obama administration has few reasonable options and that even unreasonable options such as starting a trade war by imposing import tariffs would have the opposite effect of what's intended.
Dangers of Punitive Action Against China
"The problem is that, if anything, that policy would be likely to slow down China's reform," Levy says. "The Chinese react very badly to any perception of international meddling. They see it as a domestic issue."
Punitive action such as the adoption of Schumer's bill could make it impossible for advocates in China of letting the yuan appreciate more to express those views, he says.
The principal supporters of yuan appreciation are mainly in the central bank, where they see a stronger currency as a way of containing inflation. Opponents are largely in the ministry of commerce and fret that many companies in southern China have such low profits that a dramatic rise in the value of the yuan could force them out of business.