Japan and the United States are stepping up calls on China to revalue the yuan, charging that while growing economically, it is spreading deflation and trade deficits by exporting goods at an unfairly low exchange rate.
But Beijing is showing no signs of yielding, and says Chinese exports do not have a decisive impact on world prices.
“No country in the world makes currency adjustment decisions based on the international situation alone without analyzing its domestic situation,” Chinese Minister of Commerce Lu Fuyuan told the fifth Asia-Europe Meeting of Economic Ministers in Dalian last week.
At the ASEM Finance Ministers’ gathering in Bali two weeks earlier, European countries agreed that the yuan’s current exchange rate does not reflect the real strength of the Chinese economy. That suggests cheap Chinese goods are also flooding European countries.
China accounted for 19 percent of Japan’s imports in June and 23 percent of the U.S. trade deficit in May, dragging down domestic prices in both countries.
Tokyo first called for a revaluation of the yuan, which is effectively pegged to the dollar.
In an article that appeared in a British newspaper in December, Haruhiko Kuroda, then vice finance minister for international affairs, said China is exporting deflation. Finance Minister Masajuro Shiokawa has agreed, saying Beijing must allow its currency to appreciate.
But many observers say Japan, unable to find an effective way to fight domestic deflation, has singled out China as its whipping boy.
Wu Chunhua, a senior analyst at Japan Research Institute, noted that imports from China account for only about 1 percent of Japan’s gross domestic product.
“Can it be said that China is the root cause of deflation?” Wu asked.
“I don’t buy the argument that China is moving prices in Japan,” said R. Glenn Hubbard, former chairman of the U.S. presidential Council of Economic Advisers.
The situation is more or less the same in the United States.
U.S. manufacturers, hit hard by cheap Chinese imports such as clothing and home appliances, are calling on the administration to take measures to stem the inflow.
By criticizing China for creating “deflationary pressure,” the administration believes it can obtain support from other countries without being viewed as protectionist.
“The ‘China is a bad guy argument’ is the administration’s grand tactic to win the presidential election” next year, one economist said.
The situation on the Chinese side is also complicated.
Beijing can ill afford to revalue the yuan because that would not only slacken its export-led high economic growth but also make manifest the country’s bad loans, estimated to account for as much as 20 percent of Chinese GDP.
This would force the government to streamline inefficient state-run corporations and deal with other economic problems, including a sharp rise in unemployment.
On the other hand, some Chinese business leaders are calling on the government to revalue the currency to lure foreign investment.
Under the circumstances, the Chinese government will revalue the yuan “gradually” beginning next year, said Chi Hung Kwan, a senior fellow at the Research Institute of Economy, Trade and Industry.
But if other countries intensify their pressure on Beijing, it would arouse opposition among Chinese people, making it difficult for the government to revalue the currency, Kwan added.