China Tells US Not to Mess with Dollar-Yuan
Peg
Faced with continued pressure from the US to devalue
the yuan against the US dollar, China has told the
US that it may affect purchases of US Treasuries. The
Chinese yuan or RMB is pegged to the US dollar at an exchange
rate of 8.28 to US$1.
On the US side, the Bush administration is under pressure
to curb the export of US jobs to other manufacturing countries,
especially China. The National Association of Manfacturers
(NAM) has been especially outspoken in its criticism,
and the Bush administration's Treasury secretary, John
Snow, has made remarks to the effect that China should
undo the dollar-yuan peg, allowing the yuan to rise against
the dollar, and making American exports more competitive.
In direct talks with the US, China has been less confrontational,
but in talks with Asian countries, it has taken a hard
line. Finance Minister Jin Renqing in a talk in Manila
said that undoing the peg would cause havoc to a world
economy already facing uncertainty. He defended the peg,
saying that since it was put in place in 1994, it has
protected Asia's economy from the Asia financial crisis
of 1997, and guaranteed the stability of the Asian economies.
However, since the US has continued to apply pressure,
it is believed that Chinese finance ministry officials
will travel to the US and tell their US counterparts that
continued pressure to undo the peg would potentially mean
that China would potentially slow down purchases of US
treasuries.
China is now the world's number two buyer of US treasuries,
after Japan. Currently, it holds US$122 billion worth
of US treasuries, up from $60 billion in 2000. Since the
growth of the deficit under the Bush administration shows
no signs of slowing down, the US will be more dependent
on the China trade surplus to soak up US treasuries.
Domestically, China is committed to a low yuan because
it needs to convert the economy from a largely state-owned
economy to a largely privatized and urbanized economy.
A more expensive yuan would lead to higher unemployment
and social displacement during a very delicate transition
period.
Politically, the US is now dependent on China as a facilitator
and host of discussions with North Korea about nuclear
disarmament on the Korean peninsula, and to defuse the
crisis. US military forces are now already over-stretched,
and a military confrontation on the Korean peninsula would
certainly lead to civilian deaths in the hundreds of thousands,
and damage which could bring down the world economy.
The conclusion is that there is not much the US can do
to undo the dollar-yuan peg, aside from making sounds
to appease the Bush administration's domestic constituency
during an election year.
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