Much Ado About the Yuan

China’s move to revalue the yuan from its decade-long pegged rate of 8.28 to the US dollar to a minimum of 8.11 based on a basket of undisclosed international currencies has been lauded by US pols as a hopeful first step in reducing China’s $160 billion-plus trade surplus with the United States, and as a key factor in leveling the playing field for US manufacturers. Nothing could be further from the truth.

“They’ve put in place a mechanism that provides room for significant movement over time in the currency, and they’ve expressed a commitment to using market forces to let the currency move,” US Treasury Secretary John W. Snow said. “I think today’s developments are extremely positive.” Federal Reserve Chair Alan Greenspan has called the shift a “good start.”

Critics of China’s economic policy have long cited an artificially low valuation of the yuan as the main roadblock to reducing the deficit. Congress has even gone so far as to propose strict tariffs beginning in September.

The problem with this perspective is that it does not account for China’s booming imports market. The strengthening of the yuan against international currencies will allow China to get more bang for its buck when it comes to the importation of critical infrastructure materials such as steel and oil. This is by no means a slowdown of the Chinese economic juggernaut, but rather a nifty sidestep in the interests of further long-term growth, while mollifying U.S. concerns.

The currencies that the yuan will be managed against have not been announced by the People’s Bank of China, and little can be made of the move until they are known. Also, China intends to choose a currency every day that will act as a reference currency, furthering its ability to manage the market to its advantage.

The yuan value gain will only serve to entice prime brand name companies for Chinese buyouts and escalate exports to brand identifying American consumers. Until American retailers stop facilitating the sale of cheaply made goods, the value of the yuan will have little effect on our national economy.

After all, even if the yuan reaches a critical value, causing prices of Chinese imports to rise, there is a whole world of cheap labor for not only American but also Chinese companies to exploit and profit from.