|
|
After the Yuan Revaluation by Nina So 7/25/2005
|
The revaluation of the yuan will play a defining role in the long-term development of the Chinese economy. This move, while potentially beneficial to the US in the short-term, could offer a more somber economic outlook in the long-term. Last week, China made the much-anticipated change to its fourteen-year old currency peg and revalued the yuan by 2.1% from 8.28 to 8.11 against the dollar. It also broke off its strict yuan peg to the US dollar by announcing the pegging of its currency to a basket of other currencies including the greenback.
Focusing on the most obvious and immediate effects of this revaluation, domestic manufacturers in the US will find temporary relief from the stifling competition of cheap Chinese imports. US manufacturers have witnessed an influx of Chinese imports, most notably in textile imports, which have flooded world markets after global quotas were lifted in January of this year – the US alone experienced a 9.8% increase in February. A drop in demand for Chinese goods will naturally follow an appreciation of the yuan as goods become more expensive. But a 2.2% appreciation of the currency will hardly make a dent in US demand for Chinese goods because the cost of Chinese labor remains a mere 3-5% of its US counterpart.
Yet even if the revaluation were more significant, the break from stark Chinese competition would be short-lived as importers of cheap goods substitute away from Chinese goods in favor of even cheaper alternatives offered by countries in the South-East Asia and in South and Central America. Reports show that US retailers, including retail giants Wal-Mart Stores Inc. and Gap Inc., among others; had already increased their purchases of inexpensive clothing and jewelry from India, preempting rising costs when their biggest overseas supplier revalues its currency. In addition, JC Penney, one of America’s largest department stories, has recently announced that it would double its textile purchases from Pakistan because of improved quality. American manufacturers will thus not see any drastic alleviation of foreign competition even after a yuan revaluation. Ultimately, a stronger yuan will prove insignificant in trying to protect USjobs as countries, other than China, are ready to supply goods and services at lower costs than in the US.
This article contains the following sections:
Impact on US Interest Rates
Freeing up Resources
What About Tariffs?
What’s Next?
You need to be logged in to Forexnews to view the remainder of this article. Please login with your username and password at the top left corner of the site, or Request Free username and password to receive full access.
