Chinese Media Turns Positive on Yuan Revaluation
Squeezed by falling profits, many Chinese manufacturers
are appealing to the Chinese government to revalue the
yuan upwards against the dollar, breaking the current
fixed rate of exchange pegged at 8.28 yuan to the US dollar.
While the US government has been pressing China to revalue
the yuan for more than a year, the Chinese government
has strongly
resisted. Now, with profits of Chinese manufacturers
falling, the appeal of a small rise in the yuan against
the dollar looks more appealing.
Chinese manufacturers, while enjoying some of the lowest
costs in the world, depend on commodity imports for manufacture.
Commodity imports are priced in US dollars, and as the
dollar falls, key commodities such as steel
have shot up, driven by a loose US monetary policy and
strong Chinese demand. In order to offset these price
rises, key makers such as Baosteel have invested
overseas to secure foreign sources. The main areas
for commodity investments have been Australia, Africa
and South America, all of which are rich in natural resources.
Most Chinese companies do not have the resources to make
large investments of this kind, and their profits are
falling. These companies are now pushing for an upward
revaluation of the yuan.
The US Fed has pursued a loose monetary policy over the
past two years, hoping that liquidity in the market would
push increased demand. Instead, money has flowed into
the more liquid parts of the economy, such as the stock
market. In the US retail financing market, low interest
rates have pushed home refinancing. The US government,
facing an election year, hoped that this easy money would
encourage job growth. Only recently has the US economy
begun to show signs of job growth.
The net effect has been to export inflation to China
as commodity sellers turned cold on the US dollar. As
if things weren't complicated enough, Chinese consumer
demand for private automobiles has taken off, and China
is now the world's second largest oil importer, only after
the US. This comes when the easily accessed oil reserves
worldwide are dwindling. And these are mostly in politically
troubled parts of the world.
Since there is much more manufacturing in China than
in the US, price inflation hits China and Chinese consumers
before it makes its way to US consumers. In the Chinese
media, more Chinese makers talk about falling profits,
and how it is hurting their businesses.
The Chinese government is much more likely to react positively
to domestic internal pressure to revalue the yuan than
from external US pressure. US pressure is seen as serving
narrow US interests, while Chinese pressure serves Chinese
interests.
For the Chinese government, the pressure is becoming
intense to get bad loans off the books of its state-owned
banks before the yuan becomes a convertible currency.
So far, it's performance in this area has been less than
impressive.
The Chinese financial sector needs stronger medicine
to get its act in shape before the yuan can become a global
reserve currency.
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