Yuan rise is not the cure: economists
Updated: 2012-02-14 15:28
By Zhang Yuwei (China Daily)
A woman poses for a photograph with an art installation depicting a bundle of Chinese one-hundred yuan notes in Beijing. A study by Barry Eichengreen of the University of California, Berkeley, and Hui Tong of the International Monetary Fund said a yuan appreciation might have an overall negative effect on foreign companies. [Raul Vasquez / Bloomberg]
NEW YORK - While the Chinese currency rate has been hotly debated topic among US lawmakers, who often link it to the trade deficit and job losses in the US, one factor has not been discussed much how the yuan appreciation would affect foreign companies that are listed on the world stock markets.
In a recent study on the impact of the revaluation of companies, two economists Barry Eichengreen of the University of California, Berkeley, and Hui Tong of the International Monetary Fund (IMF) argued that a yuan appreciation might have an overall negative effect on foreign companies.
The authors examined performances in share prices of more than 6,000 manufacturing companies from 44 countries during two announcements of the Chinese currency exchange rate by the People's Bank of China (PBOC) in July 2005 and June 2010.
China revalued the yuan by 2.1 percent against the dollar in July 2005, and the yuan has appreciated at least 7 percent against the dollar since June 2010.
"Overall, the message is that across-the-board inferences are misleading," said Tong, an economist with the IMF and co-author of the report.
"The long-run effect is difficult to estimate due to compounding factors. But around those two PBOC announcements, the US stock markets experienced negative returns (-0.69 percent around July 21, 2005, and (-0.39 percent around June 21, 2010), much lower than other countries," Tong said.
Tong noted that suppliers of inputs for China's processing exports, in contrast, experienced no significant net market-valuation effects at the time of the two PBOC announcements.
The two economists indicate in the report that while yuan appreciation has a positive effect on companies exporting goods to China, it has little positive or even a negative impact on those providing inputs for China's exports.
And the latter is an increasing phenomenon in the manufacturing industry, in particular, when China is largely regarded as the "world's factory" of manufacturing.
"The impact of renminbi appreciation actual and prospective on firms, sectors and countries will be very different depending on their circumstances and the specific nature of their interaction with China," Tong explained.
The report indicates the exchange rate of the yuan is not a simple issue.
The US Senate passed a bill last October proposing tariffs for any country deemed to be undervaluing its currency. However, the bill was not supported by the House of representatives or US President Barack Obama.
The Chinese currency issue has also been frequently raised in current Republican debates, experts say, mostly because they want to use China as a scapegoat. Republican front-runner Mitt Romney even called China "a currency manipulator".
Currency appreciation by China will not solve the unemployment situation in the US and it will not solve the manufacturing competitiveness, said Eichengreen of Berkeley, co-author of the report.
"China is only one of the many US trade partners and the level of the currency is just one of many things that affect China-US trade. If you put that together, even a substantial appreciation of the China's currency wouldn't have a big aggregate impact on the US," he explained.
Yao Yang, a Chinese economist at the China Center for Economic Research, said at a recent economic forum at the New York Stock Exchange that even if China is forced to give up exporting some of its products once the yuan appreciates, the US will still have to buy those products, which it usually does not manufacture, from other countries which neither helps bring down its trade deficit nor create jobs.
While yuan appreciation might benefit foreign auto companies, which export products to China, Tong cited American companies like Intel and Apple, saying they are companies that will suffer when the yuan appreciates against the dollar.
Tong describes it as a chain effect.
"When the yuan appreciates, the labor cost will rise in China, American companies such as Intel and Apple, which have some parts (of their products) produced in China, will be likely to make less profit," Tong said.
For example, the US semiconductor sector experienced a decline of 1.6 percent on the first trading day after the June announcement in 2010, despite providing equipment for China's computer assembly.
Meanwhile, Tong said, the computer equipment sector experienced a decline of 0.6 percent on the same date, the result of importing back China's increased cost.
Therefore, it's not hard to see what it means for companies like Apple which has a larger market outside of the US.
The recently released iPhone 4S, for instance, is sold in 90 countries and the company earns nearly 60 percent of its revenue outside of the US.
But the US is actually where high-end jobs in product design, software development and marketing, are located.
In the meantime, China is still playing the "world's factory" role in this process.