Making the Yuan Right
Aaron Hand, Managing Editor -- Semiconductor International, 9/1/2005
Responding to global criticism that its currency was undervalued, China announced in July that it was ending its practice of pegging the yuan to the U.S. dollar. Instead, the yuan will fluctuate based on a currency basket dominated by the U.S. dollar, euro, Japanese yen and South Korean won. The immediate effect was a revaluing of the yuan by 2.1% to 8.11 yuan per U.S. dollar, a small change from the previous peg of ~8.28 yuan per dollar that had been in place for more than 10 years.
While some applaud the move as a step in the right direction, others complain that it's not nearly enough. Comments from both the Semiconductor Industry Association (SIA) and the Electronic Industries Alliance (EIA) point to the positive aspects of the yuan revaluation — that U.S. imports into China will become less expensive and therefore more attractive. "We believe this pragmatic approach will allow the yuan's value to rise against the dollar in a way that will allow U.S. manufacturers to compete more fairly in the world market and will not destabilize China's domestic economy," said Dave McCurdy, president and CEO of the EIA, in a statement.
Criticism from officials in the United States, Europe and Japan has argued that China should let the yuan strengthen further than the 2.1% revaluation. The IPC-Association Connecting Electronics Industries released a statement to convey its disappointment. "In the short term, these changes will have little or no impact on the balance of trade and the U.S. electronics manufacturing sector," said Dan Feinberg, chairman of IPC's Government Relations Steering Committee. The committee's ultimate goal, he added, is a revaluation of 40%.
Few would argue that China's reform is a bad thing. The yuan revaluation is certainly a step toward making China a more respected player in the global economy. Letting the yuan strengthen may also help China control inflation by reducing the cost of imported products. Despite the 2.1% being a modest improvement, it may also still offset criticism from the Bush administration that China's currency policy is to blame for a record trade deficit ($162B last year) and the loss of 2.8 million manufacturing jobs in the United States. With currency manipulation, some economists contend, the yuan may have been undervalued by as much as 40%.
It's easy to say that manufacturing growth and increased outsourcing in low-price markets has cost jobs in the United States, Europe or Japan. When China was admitted into the World Trade Organization (WTO) in 2001, its government said it would work toward making the yuan convertible. According to some reports, China plans to make the yuan freely traded by 2008, when Beijing is slated to host the Olympic Games.
But to call for an immediate 40% revaluation of the yuan — or even the 10-15% requested by the Bush administration and members of the U.S. Congress — is to have little regard for an increasingly important player in the world economy. China's domestic industries — including the burgeoning semiconductor sector — would be severely hit by a more significant yuan appreciation. And those foreign companies operating in China may not fair much better.
Semiconductor International is a magazine that serves the global semiconductor community — a communicty with companies headquartered around the world, as well as companies that are in themselves global entities. As such, I will not argue that China's yuan revaluation creates a fairer playing field for U.S. manufacturers, because it's not that simple. Although a stronger revaluation of China's currency could indeed help foreign manufacturers that are struggling to get their imports into China, it could also hurt companies that have already set up fab operations in China to manufacture chips for export. In addition to increasing the cost of the exported goods themselves, a stronger yuan will undoubtedly increase the cost of labor in a country whose strong appeal rests in part on cheap labor.
No doubt that the U.S. and European economies have been hurt by the artificially low value of the Chinese currency. But the small step that China has taken to rectify the situation is a good one — one that is less likely to destabilize the Chinese economy and perhaps, in turn, the global economy.
