Subject: Re: Why China Is Unwilling to Revalue the Yuan - Baseline Scenario
From: "Michael Andrews" <[email-masked]>
To: "Hunter Biden" <[email-masked]>
Date: Fri, 1 Oct 2010 15:54:41 -0400

Hunter,

Let's get together next week. Let me know a good day to stop by.

Michael
On Oct 1, 2010, at 11:57 AM, Hunter Biden wrote:

> M-
> Sorry I missed you this week.  Eric spoke to me- we can discuss in  
> person   nxt wk.
>
> R. Hunter Biden
> 202-333-1880
>
>
> On Oct 1, 2010, at 9:32 AM, Michael Andrews <[email-masked]> wrote:
>
>> Why China Is Unwilling to Revalue the Yuan
>> with 3 comments
>>
>> The following guest post was contributed by Ian Lamont, an MIT  
>> Sloan Fellow. He was previously the managing editor of the Industry  
>> Standard, and has also researched China’s state-run media and  
>> communications policies.
>>
>> For years, China has been subject to enormous external pressure to  
>> increase the value of its currency, or let it float on the open  
>> market. While doing so might relieve pressure on foreign economies  
>> by boosting their exports and reducing trade deficits, it runs  
>> counter to Beijing’s domestic priorities, which involve doing  
>> everything it can to preserve economic growth and domestic  
>> stability, and by extension, its hold on political power.
>>
>> All countries exploit the dynamics between their political and  
>> economic systems. But China’s situation is exceptional. For three  
>> decades, the government of the People’s Republic of China has  
>> perpetuated a grand political dream, claiming a single-party  
>> political mandate from the Communist ideals espoused by Mao Zedong,  
>> while simultaneously drawing power from the capitalist canon.  
>> Beijing has been able to pull it off, largely through the promise  
>> of spreading wealth and opportunities to even the poorest of  
>> villages and maintaining benefits for cadres and workers in state- 
>> owned enterprises which cannot easily be absorbed into the  
>> capitalist system. A high rate of GDP growth is required year after  
>> year to maintain this state of affairs.
>>
>> A sudden change in the value of the Yuan could have the effect of  
>> throwing a wrench into the works, potentially setting off a chain  
>> reaction of factory closures and layoffs across the interconnected  
>> networks that drive China’s export-oriented economy. In the short  
>> term, China might be able manipulate legislation, the banking  
>> sector, and welfare levers to prop up key industries or regions.  
>> But in the long term, it is uncertain if these steps would be  
>> enough to preserve social stability or continued loyalty to the  
>> Communist Party.
>>
>> What sorts of domestic consequences would result from a slight  
>> uptick in the value of the Yuan? The currency is now trading at  
>> about 6.7 renminbi to the U.S. dollar. At the very least, Chinese  
>> exports would become slightly more expensive to foreign buyers. The  
>> resulting drop in Chinese exports would put marginal factories out  
>> of business and put their workers on the streets. Other companies  
>> wouldshift low-wage manufacturing to countries such as Vietnam and  
>> Sri Lanka. In the industrial parks around Shenzhen, the unemployed  
>> could be reabsorbed into the local manufacturing economy. In remote  
>> interior provinces, where economic institutions are less developed,  
>> there would be fewer opportunities, and a corresponding rise in  
>> poverty, anti-government feeling, and isolated “mass incidents.”
>>
>> But what would happen in the case of extreme economic disruption,  
>> prompted by a sharp change in the exchange rate, the currency  
>> openly floating on the world market, or some other unforeseen  
>> effect of a revaluation? The social and political turmoil unleashed  
>> by a sharp, sudden slowdown of the Chinese economy could  
>> potentially lead to Tiananmen Square-scale protests, widespread  
>> domestic instability, and an exodus of migrants or refugees to  
>> neighboring countries and overseas.
>>
>> China is not attempting to hide its fears. “Any significant  
>> appreciation of the renminbi will erode China’s export  
>> competitiveness overnight and impact the livelihood of tens of  
>> millions of workers,”notes an editorial authored by the pro- 
>> government China Daily and republished in China’s state-run news  
>> agency in May. The essay further describes two economic goals: To  
>> maintain a target GDP growth of 8 percent per year (a level it has  
>> achieved nearly every year for the past two decades) and contain  
>> China’s consumer price index (which it tries to keep under 3%).
>>
>> Additional factors may influence China’s currency policy in the  
>> short term. One concern is foreign policy, such as relations with  
>> key trading partners. Another is nationalist sentiment, which the  
>> Communist government has manipulated to support its own hold on  
>> power. Economic injustices inflicted by foreign powers on China in  
>> the 19th and early 20th centuries — such as the treaty ports system  
>> — still play a role in China’s nationalist propaganda. These  
>> humiliations require the current generation of Chinese leaders to  
>> tread carefully around policy changes that could be viewed as  
>> kowtowing to foreign demands.
>>
>> So, for foreign governments, companies, and labor groups expecting  
>> China to allow its currency to appreciate, there may be no  
>> significant movement until China’s back is truly against the wall —  
>> or the leadership in Beijing can find a face-saving way to  
>> convincingly portray a revaluation as an advance demanded by its  
>> people, as opposed to a policy shift dictated by foreigners. In  
>> addition, China’s trading partners need to be aware that a change  
>> in the value of the Yuan will not by itself erase their trade  
>> deficits or reduce their dependence on cheap manufactured goods  
>> from abroad. Such a shift may even lead to problems that have long- 
>> lasting implications for China’s people and the global economy.
>>