SCDigest Editorial Staff
For several years, politicians in Washington, labor leaders, and some US business interests have called on China to revalue its currency versus the US dollar, as the yuan has retained a fixed value to the dollar even as Chinese exports the US have surged along with the US trade deficit. Unlike most other major world currencies today, the yuan’s value does not openly trade in global currency markets, but rather stays pegged at a fixed exchange rate to the dollar based on decisions by the Chinese government.
Pressure on the Chinese to increase the valuation of the yuan versus the dollar have come from both sides of the political aisle, but has become more pronounced during the Obama administration. Yuan valuation is one of several issues behind the increasingly rocky relationship between Washington and Beijing. Many believe a re-valuation would reduce US imports from Chinese and increase the competitiveness of US goods being sold into China, creating a boost to US manufacturing in the process.
“To some in Washington these days, adjusting the yuan-dollar exchange rate is the fix for all America's ills,” Joseph Sternberg, editor if the Wall Street Journal Asia's Business Asia column recently wrote. “That single number supposedly determines which jobs stay in the United States and which go to China. It dictates which and how many goods move where. It's attributed the mystical power to raise or destroy mighty economies by its movements or lack thereof.”
Certainly, substantial revaluation could change the cost dynamics of China sourcing, but it is almost unthinkable that the Chinese government would re-value the yuan in way that would make much of a dent in China’s export volumes to the US. Last year, a leading Chinese economist suggested the country should consider a revaluation of some 10%, which many thought may have been a Chinese government sponsored “trial balloon” indicating a potential one-time move of the yuan to pacify US critics without causing much damage to the country’s export machine. (See
New Call in China to Let Yuan Rise 10% Against Dollar.) Most now though seem to think a rise of 10% is more than double what the Chinese government might eventually agree to.
What is the Relationship between Yuan Value and Price?
A critical question though is how much impact any sort of revaluation is likely to have in practice. Chinese manufacturers could react to a re-valuation by reducing prices to compensate for the effective rise in their sales prices that would result from a more richly value yuan - a move that could potentially be supported by the Chinese government increasing its current levels of export incentives.
The other reality is that the total cost of imports from China are not as fully tethered to the value of the yuan as some in Washington and elsewhere may think. A 5% appreciation in the value of the yuan will not usually result, for example, in a direct rise in the pricing of Chinese exports by an equal amount.
One of the most important factors is the cost of any raw materials or commodities used in the manufacture of goods. That includes everything from iron ore to steel to cotton to oil. Those commodities are based on global prices for goods regardless of where they are purchased, and are generally valued in US dollars. Thus, those costs would be unaffected by a yuan revaluation. The greater the percentage of an item’s total cost that is driven by raw materials and commodity pricing, the less a yuan revaluation would have on the price of finished goods coming out of China.
Logically, a revaluation of the yuan would likely have the largest impact on goods that are the most labor intensive to produce, such as apparel items that rely on manual sewing operations. However, rising labor costs in China that have nothing to do with yuan revaluation have already pushed many US companies to look to Vietnam and even Africa as sourcing regions for those types of high labor content goods.
In fact, rising labor costs generally are by far a larger concern for Chinese manufacturers than a yuan revaluation.
Story Continued Below
|