YES, says Dr Andrew Black of TLE Strategy:
Politicians and economists in the US have made it quite clear they think the yuan is already undervalued. But how do the arguments stack up when seen through the eyes of a Communist Party mandarin?
One rule of thumb is that every percentage point of economic growth in China creates an additional million jobs. What is less well understood is how many jobs are lost when GDP growth drops by a percentage point or more. It is estimated that some 20m rural migrant workers have recently lost their jobs, representing 15 per cent of rural migrant workers.
This will add to an already high unemployment rate of 9 per cent (and that's just the official figure - the real number may well be higher). The mandarins will clearly be concerned about a growing pool of increasingly well-educated but unemployed people, who could become a source of social disorder.
And for China, the yuan/dollar rate is not the key yardstick. The issue testing brains in Zhongnanhai, the leadership compound where Beijing's elite gather to formulate policy, is more likely to be the substantial appreciation of the yuan against the currencies of other Asian trading partners. Voices within Chinese industry are saying that this has been too much too soon, and is causing a loss of competitiveness.
Faced with falling exports, the government has already introduced several new measures to bolster domestic consumer demand, such as boosting public-sector salaries and reducing some sales taxes. But some in Zhongnanhai think these measures will be too little, and their attention may well shift to the exchange rate, as it has done in previous slowdowns.
Recent analysis at TLE has emphasized the importance of understanding the differences between rural and urban China, and the impact of rising income differentials. In 2006 Chinese officials estimated that 25m workers were competing for 11m jobs in urban areas and that by 2010 there would 10m urban unemployed - and this was before the crisis hit.
So while a Westerner might regard the yuan as being seriously undervalued, China's new mandarins may politely point out that a revaluation has already occurred - and that it might already have gone too far.
NO, says Michael Pettis, professor of finance at Peking University:
"Although it might make Chinese manufacturing exports seem more competitive in the near term, there are at least two serious problems with devaluing the yuan. The short-term problem is that with global demand contracting, and with China's trade surplus nonetheless rising, any attempt by China to force more overcapacity onto a struggling world will require an even sharper contraction in manufacturing among its trade partners.
With protectionist sentiment on the rise everywhere, a devaluation of the currency would be seen as China's answer to Smoot-Hawley, the notorious bill passed by the US Congress in 1930 that put the nail in the coffin of international trade. This would almost certainly lead to an increase in trade friction, and in a world of contracting demand, countries with excess capacity – the trade surplus countries – are extremely vulnerable to a collapse in international trade. Even more than the US in the 1930s, China would suffer enormously from a trade war.
The longer term problem is that China's economy must make the transition from export orientation to reliance on its domestic market. The process is never easy. To devalue the currency now would mean failing to take advantage of the shift that is already taking place and would push the economy in the wrong direction – that of further constraining already-too-low domestic demand, while increasing the importance of the export sector in the Chinese economy. The difficult transition from export reliance to reliance on domestic consumption is not a problem that can be evaded, and postponing it will only make the transition worse.
As counterintuitive as it may seem, China should actually continue revaluing the yuan, but before doing so it must reach an explicit agreement that in exchange for revaluing, its trade partners will maintain open markets for China’s exports. As the world’s leading provider of excess capacity, China cannot avoid a difficult adjustment in a world of collapsing global demand. The goal of policymakers must be to slow the necessary adjustment over several years by negotiating an orderly decline in global trade imbalances. This requires cooperation, not devaluation."
