China is becoming financial powerhouse
By Jerry Epperson -- Furniture Today, February 23, 2004
For as long as we can remember, China's government has tied its currency, the yuan, to the U.S. dollar. This fixed exchange rate sets a constant proportionality to some of the country's competitive advantages, the most obvious being low labor costs.
This is not a new strategy. Japan did it for much of the 1980s and experienced unprecedented growth and prosperity in that period.
Just last summer, President Bush was rebuffed when the Chinese refused to compromise even 1% on the yuan/dollar ratio. But a recent article in The Wall Street Journal by Charles Hutzler, "China Rethinks The Peg Tying Yuan and Dollar," indicates change may be coming soon.
He quotes respected economists (yes, there are some) and other authorities as saying that, with the Chinese economy growing fast and with two years of an ever-weakening U.S. dollar, inflation is becoming a problem. Inflation in China was over 6% in the month of December, according to the article.
Because China is shipping so much stuff around the globe, the Chinese "financial system is awash with money," with reserves rising 20% in 2003 to $160 billion. It's also benefiting from foreigners trying to bring in money to participate in its growth. The U.S. trade deficit with China was $120 billion last year, in case you were curious. In furniture (all types), for the first nine months of last year, we imported $5.6 billion from China and exported $17 million to that country.
Experts expect any change in the currency to be very gradual, perhaps 5% or so. The economists we monitor estimate the yuan is off 42% to 50% of what it would be if it were allowed to float relative to the U.S. dollar.
Any change is seen as positive, at least recognizing that a problem exists. But we shouldn't expect China to do anything that's not good for China.
Through government programs and assistance, successful education and training, and a lot of hard work, China is becoming not only the world's factory but a financial powerhouse as well. If current trends continue, its standard of living will meet or exceed many of the so-called developed nations.
Some believe that a currency adjustment is all we need to be competitive with China. The WSJ article may have them feeling they are about to be right. Don't fall for that. China has lots of options, and will try to turn various global issues to its own good.
We shouldn't expect it to do otherwise.
