Will China Re-value Its Currency?

As the G-20 leaders meet in Seoul, Korea, pressure is on for China to re-value the yuan in order to decrease its huge trade imbalance with other nations, especially the United States. The American president, Secretary of the Treasury, and leading members of Congress are all calling for the Chinese to allow the yuan to appreciate, so that American goods won’t be so expensive and Chinese products won’t be so cheap. That would greatly help our economy – or so the argument goes.

In fact, China has loosened its grip on the yuan, permitting it to rise gradually over the past few years, and is committed to a similar policy in the future. So, the Chinese are re-valuing their currency, just not as fast as others want.

Why not?

In a recent speech, Chinese Premier Wen stated, “If the yuan isn’t stable, it will bring disaster to China and the world… If we increase the yuan by 20-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil.”

Note that last word: “turmoil” (luan). It’s a venerable term that expresses the deepest fear of both Chinese governments and the people. Combining connotations of chaos, disorder, anarchy, and rebellion, “turmoil” conjures up scenes of riots and revolutions, some of them local, and others toppling entire dynasties. “Turmoil” was used to describe the events of the spring of 1989, when students and others shut down Beijing for a few weeks and struck terror into the hearts of government leaders.

What’s the connection between “turmoil” and the currency, between luan and the yuan? In a word, jobs. If Chinese manufactured goods rise in price, business will slow down, factories will close, and people will be laid off. Inflation, already on the rise, will combine with unemployment to fill the streets with very unhappy people.

In Chinese tradition, the government is responsible to feed the populace. As long as they continue to provide a steady, or even rising, economic growth rate, China’s rulers can rest secure. If the economy falters, they know that their days in power could be numbered.

Already, there is tremendous discontent over rising prices and the huge gap between the rich and the poor, one of the worst in the world. So far, however, enough people have benefitted from prosperity to keep the government’s approval ratings high.

A rise in the value of the yuan could change all that, especially if it’s sudden and dramatic, as foreigners, particularly the Americans, demand. Those voices aren’t likely to be heeded, however. Chinese chide the Americans for spending too much and saving too little. They have little respect for our government’s increasingly easy money policies, which are quickly eroding the value of their vast holdings of our public debt. And they are not about risk their competitive edge just to bail us out. They’re too smart for that.

G. Wright Doyle, Director

Global China Center