The Obama administration has been gradually ratcheting up pressure on the Chinese government to make changes in the valuation of the Yuan. On September 16, Secretary of the Treasury Tim Geithner called for faster appreciation of the Yuan. While testifying before the Senate Banking Committee he stated, “China needs to allow significant, sustained appreciation over time to correct this undervaluation and allow the exchange rate to fully reflect market forces. It is past time for China to move.”
A member of the Chinese government’s monetary policy committee responded on September 20 stating that “China will not go down the path that Japan did and give it to foreign pressure on the Yuan's exchange rate.” This was a reference to currency interventions by Japan and the US during the mid 80’s to control trade deficits. The strong yen ultimately attracted huge investments in the Japanese economy which led to the infamous asset bubble in 1990.
Meanwhile with the Japanese yen approaching 80 yen per dollar, the Bank of Japan took action on September 15 to intervene in currency markets to devalue the yen. According to Bank of Japan official Masaaki Shirakawa, “We have to pay more attention than before to the downside risk of the economy. We are ready to implement appropriate action in a timely manner if judged necessary.” His reference was to a struggling export market in Japan that is creating an enormous drag on the domestic economy.
Last week Democratic leaders in Congress made plans to move ahead with a bill allowing retaliation against China for currency manipulation which escalated the issue further. Later the Chinese Premier, Wen Jiabao, responded. “The conditions for a major appreciation of the renminbi do not exist. If the renminbi were suddenly to rise by a large degree against the dollar, we cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside... China would suffer major social upheaval”.
The stakes are enormously high for the global economy. As the currencies of the top three global economies, the value positions of the dollar, yen, and Yuan have a huge impact on the flow of international trade. Often one of the threats considered to counter currency valuation issues are punitive tariffs. In fact on September 25, the U.S. House Ways and Means Committee adopted a measure to seek tariffs on Chinese imports into the USA. A vote in the House is currently set for next week. In a politically charged campaign season, it is difficult to predict what may happen next. If the bill is passed, it remains to be seen how China would retaliate and how changes might impact Japan and other APAC economies.
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