Over the weekend, China’s central bank announced its intention to let the yuan gradually appreciate in value. Contrary to what our administration would have you believe, the decision wasn’t motivated by political pressure from the U.S. China appears to have timed the announcement so as to take the revaluation issue off the off the table at the G-20 meeting in Toronto later this week.
Don’t look for the new-and-improved yuan to reset the global economy, generate lots of new manufacturing jobs in the U.S., or transform the Chinese middle class into rapacious consumers of American electronics.
By way of background, in 2008, during the global economic slowdown, China pegged the value of the yuan to the dollar (i.e., fixed the ratio between the two currencies) in order to protect its U. S. export market as demand for consumer goods declined. Critics, including Secretary of the Treasury Geithner, argued that the policy artificially undervalued the yuan, which made China’s exports cheaper and gave Chinese companies an unfair advantage over their American counterparts, resulting in U.S. job losses. Senator Chuck Schumer (D-NY) and some of his protectionist colleagues have been threatened to impose tariffs and trade restrictions unless the Chinese revalued their currency.
China isn’t going to allow the yuan to float freely (let the market determine its value). Far from it. The communist bureaucrats running the People’s Bank will allow some modest appreciation, at least until the talk of protectionist measures dies down. Eventually, the Chinese may let the yuan reset at pre-global meltdown levels.
Effects upon the U.S. economy will be minor. The price disparity between comparable Chinese and American goods is enormous due to China’s much cheaper labor costs. A minor revaluation of the yuan won’t begin to close that gap; cost-conscious U.S. shoppers will continue to opt for the less expensive Chinese products.
And Chinese shoppers will continue to save. Even with the benefit of a stronger yuan, China’s middle class won’t be buying a whole lot of iPads and Kindles, and the hoped-for increase in American manufacturing jobs is not going to happen. Personal consumption in China is much lower than in the West. The government provides little in the way of social services, so Chinese families save their meager salaries to cover the costs of education and healthcare. And since Chinese population growth has been tightly controlled for the past three decades, the aging Chinese populace is saving for retirement.
President Obama said China’s move “can help safeguard the recovery and contribute to a more balanced global economy.” Yuanna bet?
Amy H Laff is a StateBrief.com partner. A graduate of Univ of Penn and Stanford Law School, Amy practiced law and mediation on the east coast before relocating to the Valley, where she founded and chairs the AZ chapter of the Republican Jewish Coalition. Amy makes frequent media appearances, including AZ Law Channel and Tony Katz Radio Spectacular. Additionally, she works with companies and candidates on branding and communication. 
