China Asks The World Not To Beat The Yuan

China’s Premier Wen Jiabao has told European leaders that if they join the US in an effort to devalue the yuan that all will regret the decision. “I say to Europe’s leaders: don’t join the chorus pressing [China] to revalue the yuan,” Wen said.

China already faces extreme pressure from the US Treasury Department and Congress to allow the yuan’s value to be set in the open currency markets. The battle is part of a wider one which may be driven by the desire of nations to make their goods more competitive on world markets. The IMF has already warned that these efforts could cause a global trade war. That has not settled the matter at all.

The core of the Chinese argument is that if the yuan is quickly devalued it will ruin the manufacturing industry in the world’s most populous nation. Chinese businesses will find that their goods are more expensive after they are exported. A weakened Chinese industrial market will cause increased unemployment. There will be labor unrest throughout the major cities on the mainland.

China is arguing that its economy should be favored over others and that its labor force requires special protection.

A vocal minority of economists believe that the yuan’s value should stay the same. Andrew Tignanelli of Forbes puts it this way:

If the dollar devalues against the yuan, and we buy most of our goods from China, those goods will potentially become more expensive. Which do you think is more important, buying your goods for the best price possible, or giving U.S. manufacturers a potential competitive advantage against China?

The answer to that question is that Americans might be willing to pay more for manufactured goods if they believed it would save American jobs. The sacrifice, if there should be one at all, would be nearly the same as the acceptance of austerity budget measures in the UK, Japan, and Germany. Citizens in those nations have been asked to accept some short-term pain in exchange for the long-term health of their economies.

The yuan battle has become one of national comfort. The Chinese do not want their those who labor in their factories to be “uncomfortable.” US politicians do not want American unemployment to hover above 9% indefinitely. The fate of the yuan’s value may come down to which nation can convince its citizens to accept difficult times now in exchange for better ones later–always a tough sell.

Douglas A. McIntyre