Why A Fast Appreciating Yuan Won't Help US Economy
I recently attended an investing conference in New York on China, which included speeches from the likes of American Secretary of Commerce Gary Locke and hedge fund legend Barton Biggs.
Listening to many of the other speakers, I was surprised at their anger and fear towards China. I had hoped that rhetoric would dissipate after the mid-term elections last year. Many attribute China’s boom as a result of stealing American jobs and intellectual property, rather than efficient economic policies and hard work ethic.
I asked Secretary Locke to respond to my position that a fast appreciating renminbi would not create more American jobs, as companies like Nike and Apple would relocate their manufacturing to cheaper areas like Indonesia rather than back to America. I maintained that the real danger to the global economy is Federal Reserve’s latest round of quantitative easing, which already is exporting inflationary bubbles to emerging markets.
Locke responded by saying China needs to appreciate the renminbi faster to play a more responsible role in the economic system. He also said Bernanke needs to stimulate America’s economy through a loose monetary policy. He did not take into account the criticism of Brazil and Germany about the Fed’s policies.
Are Locke and the other speakers right that a fast appreciating renminbi will create more jobs on American soil? No. America’s bilateral trade surplus with China arguably could drop but the far more important metric of overall surplus won’t.
Why not? Locke himself mentioned only 1 percent of that nation’s firms like Boeing and General Electric export to other markets. In other words, America needs to get more competitive at manufacturing to reduce our overall surplus, not blame China’s currency policies. Trade patterns are far more inelastic than many economists believe.
In fact, more than 70 percent of big American multinationals operating in China told my firm they did not want the renminbi to appreciate too much because it will cut into their profits. The majority also said they would increase costs to the American consumer or move to cheaper production areas if it rose.
Aside from misguided arguments by Locke and others that China’s currency policy hurts America, there were two other areas many of the panelists got strikingly wrong on China.
First, many said intellectual property protection is getting worse there. In reality it is getting far better as the government cracks down on piracy and as consumers increasingly demand real items.
For instance, Locke said two thirds of copyright infringement cases brought against local firms in China were actually won by the American firms. That is far better than a decade ago when getting a favorable outcome against domestic firms was unthinkable. The lack of enforcement and the small size of the punishment are absolutely still a concern but the government is working to improve the situation.
Secondly, the western world does not give Beijing enough credit for pushing for equality in the legal and education systems and ridding the country of long-standing gender inequality. There are now more females in degree, MBA and PhD programs; students and women have the right to initiate divorce.
The fact of the matter is, Chinese women are becoming the great purchasing force in the country. In the 1950s, women accounted for only 20 percent of household income. That rose to 35 percent in the 1990s and is now at parity. In fact, our research suggests women there will account for 55 percent of the $11 billion of luxury goods purchased there in 2011.
Even in rural areas, women are starting to earn more than men when they relocate to urban areas. Women get jobs as waitresses and make $350 a month while their husbands take home $120 a month in construction. Many women are becoming breadwinners and changing family dynamics in the process.
As China takes its place as the world’s second superpower, America needs to understand it better in order to ensure peace and to take advantage of business opportunities. Too often politically charged rhetoric and ill-informed people are shaping American public opinion towards China. The reality is that China has played a critical role in helping the world’s economy recover from the financial crisis and is making great strides in protecting intellectual property and promoting more gender equality.
Shaun Rein is the founder and managing director of the China Market Research Group (www.cmrconsulting.com.cn) a strategic market intelligence firm, and is based in Shanghai. Follow him on Twitter at @shaunrein. He does not own stock in any of the companies mentioned.