Asian stocks have been hit over the past three days amid fears that China might give in to pressure from the U.S. and revalue its currency. A revalued yuan would likely rally vs. the dollar, hurting the competitiveness of Chinese exports, thus diminishing that nation's economic growth and demand for its neighbors' wares.
It's not going to happen.
"There is negligible risk of a
yuan revaluation anytime soon, if ever," Morgan Stanley analyst Stephen Jen wrote from Taiwan last week.
Since 1995, China has kept the exchange ratio of the Yuan pegged at around 8.3 to the dollar. If the ratio were set in the free market, the yuan would be widely expected to trade much stronger because China's fast-growing economy has attracted so much outside investment and its export surplus has risen eightfold since 1996.
American manufacturers, which say they're losing business in the U.S. and around the globe because of China's undervaluation, claim the yuan would gain 40% on the dollar in a free-floating environment.
But the Chinese have too many reasons to keep the peg, and they moved to quash the speculation Tuesday in an official statement.
"These rumors are groundless and are a misunderstanding of our country's current exchange rate policy," China's State Administration of Foreign Exchange said in a statement posted in Chinese on its Web site,
reported. "It is impossible to make the unwise move of a one-off revaluation."
To some, including
John Rutledge, such a denial is the last refuge of a country about to surrender and make a currency move, as has happened many times in the past. But in this case, that's a misreading of how China's government works, according to Jen.
China is using the undervalued currency to bolster its macroeconomic policies and has no interest in making anything but the most minimal changes, he observed.
Such minor changes won't have much impact as high oil prices are also keeping a lid on Asian currencies, Jen added. Because Japan and China import so much oil -- which is denominated in dollars -- the countries' growing energy bills are yet another mechanism for selling yen and yuan and buying dollars. Additionally, there are some, albeit a minority, who believe a revalued yuan wouldn't appreciate much vs. the dollar because of China's weak banking system and overstated growth.
Don't Believe the Spin
Still, that didn't stop traders from reacting to the rumors. On Tuesday, major bourses lost 2.6% in South Korea, 2.9% in Thailand, 1.8% in Taiwan and 1.3% in Japan. China's Hang Seng index lost 0.4%. The pressure also hit currency markets as the dollar weakened to 109.65 Japanese yen Tuesday from 111.5 yen last Thursday.
The messiness started last week when the Bush administration revealed that the president had called Chinese President Hu Jintao to push for an increase in the value of the yuan. Not surprisingly, the White House press office said Bush had extracted a commitment that China would move forward with a "market-based, flexible exchange rate."
It's a spin the White House has been dispensing for months, but it's not intended as market-moving information. Rather, the words are targeted at voters in the U.S. -- especially those in states that have lost millions of manufacturing jobs on Bush's watch, according to Guang Yang, manager of the
Templeton Global Opportunities fund.
"When the administration talked to the president of China, the purpose was really to improve their election prospects," Yang said.
"The jobs lost to China were jobs the U.S. lost to other countries 10 or 15 years ago," he continued. "Even if China devalued 20% or 30%, the jobs would flow to Mexico or Thailand."
The situation is somewhat analogous to the way that rumors about Russia's largest oil producer,
, have driven oil prices higher. Russian President Vladimir Putin wants to keep oil billionaires like Yukos founder Mikhail Khodorkovsky from getting too involved in politics.
When Khodorkovsky meddled too much, Putin had him arrested and huge bills for back taxes were levied against Yukos. To fight back, Yukos supporters made grave threats that the crisis could force the company, which supplies 2% of the world's crude, to shut down.
In reality, Putin has no interest in shutting down one of his country's biggest sources of hard dollar exports. But domestic political machinations and accompanying rhetoric can be hard for markets to ignore.
There are some who disagree with Yang, of course. University of Maryland professor Peter Morici was director of economics at the U.S. International Trade Commission in the mid-1990s and has been a proponent of some protectionist policies like imposing steel tariffs.
He says the U.S. economy would grow another 1% a year if China and other Asian countries allowed their currencies to rise in value, reducing their competitive advantage vs. U.S. manufacturers.
That's because the U.S. is largely financing its import spending binge with money from the Asian countries doing the selling. In the first half of 2004, foreign governments -- almost all in Asia -- bought U.S. securities at an annual rate of $404 billion.
If the U.S. made more of the stuff it's importing, or was better able to compete with Asian exports abroad, borrowed money would go to build up those exporting industries instead of just being spent on foreign goods and shipped out of the country.
Careful What You Wish For
"The monies borrowed from foreign governments to cover these purchases are not financing investments in new productive assets," Morici wrote in a recent forecast. "Rather, this borrowing merely permits Americans to live beyond their means -- the average Chinese is now loaning Americans about one dollar in every ten that he earns."
That's actually a reason why the U.S. might not want the Chinese to revalue the yuan, although Morici dismisses it. If China and other Asian banks didn't have an interest in propping up the dollar by buying U.S. treasuries and thereby lowering interest rates in the U.S., who would?
Morici has suggested in congressional testimony that the
could make the purchases itself. But the scale of such a required intervention would be unprecedented and hardly seems possible.
In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send