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July 26, 2005

The Chinese Yuan Revaluation Scheme: When An Offer of Appeasement is a Veiled Threat

While John Snow, Secretary of the United States Treasury, publicly offered praise, forex specialists downplayed the revaluation of the Chinese yuan, as did we. Why? A mere 2.1% movement in the currency, a narrow band of 0.3% in which it will trade – when 5-10% was predicted -- and the statement by Li De-shui that five more years will pass before the yuan may (not “will”) trade freely.

Chinese policy will change whenever it does, regardless of announcements. The chaotic torrent of conflicting statements on revaluation prior to that of last Thursday is proof aplenty. (I hesitate linking to them all for lack of space.) So the possibility of further revaluation exists. As does intelligent life on Neptune.

Indeed, it is more than likely than any further revaluation of the currency, if any occurs, will occur in the far-off future. This minor revaluation relieves China of its burden – mounting international pressure to acknowledge and appease. One can almost hear the echoes from half a globe away: “ 好了, 好了！给他们一点点就算了！” (“All right already, give them a little and be done with it!”)

Many outside China, however, had awaited more significant change with bated breath. Did the Chinese leadership expect that less would be seen as more? Not likely.

Since the earliest days of this weblog in 2000, I’ve consistently predicted that the yuan would not be revalued. [Unfortunately, the old site hosted at Salon.com is no longer accessible.] Despite economic indicators, unreliable at their core, and a Western fantasy of a China integrated with the world community, the Chinese leadership was unlikely to jump at an opportunity to injure the national interest where no palpable threat could be discerned.

After all, a fragile financial system and an uncontrollable currency make for frightening bedfellows. Remember what happened in Taiwan after revaluation in the mid-1980s -- I was there when it did -- and that system was stable. Exporters faced a miserable profit crunch that forced many out of business or off into southeast Asia; the island opened to competing imported products; and buyers went elsewhere to find sources. Just as importantly, the culture of the island changed，one would dare to say, radically.

And let us not forget the Chinese export machine that attracts investment, pumps out substantial revenues, employs at least tens of millions and indirectly helps to prolong the life of the Party. I am not talking about a party with funny hats, horns and poppers, but the Chinese Communist Party (CCP).

Technically, my prediction was wrong: the yuan was revalued last Thursday. But only minimally and to no significant effect.

And there was no threat -- no threat that was great enough to stimulate movement by the Chinese. What about the proposed Graham-Schumer bill in the American Congress? It would add a flat 27.5% tax on all Chinese imports. A fantastic idea, but only if your average WalMart shopper (and voter) could find pleasure by adding 27.5% to his bill at the checkout register. One can't imagine this bill passing.

Given the energy invested by the Americans in its full-court press, as well as the keen expectation that seemed to course electrically through world business communities, none can be delighted with the Chinese decision, perhaps not even the Chinese. So is this why the U.S has delayed review of CNOOC’s proposal to purchase Unocal? And CNOOC may now go "hostile?"

"Should the Chinese company fail to gain the backing of Unocal's board, it could explore other options including going hostile by taking an improved offer directly to shareholders. "At the end of the day, this is [Unocal] shareholders' call and not the board's call," says a person close to the deal. "The option is certainly there. Whether we use it depends on what happens in the next few days."

[Both links to FT require a subscription.]

What is the Bush administration to do, given the enormity of its failure to move the Chinese towards assumption of its notion of “free and fair trade?” China’s revaluation scheme is a threat. “We may move,” one might hear them say, “if we move at all, but we will move only in our interest and at the time of our choosing.” A very slight bow in acknowledgement of a demand, but never what might be perceived as 磕头 (“kow-tow”). Americans take notice.

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