China Currency Under Pressure
Business + Economy

China Currency Under Pressure

BEIJING — For years, the chief source of tension between the world’s two biggest economies has been Washington’s concern that China undervalues its currency to bolster trade.

Suddenly, it’s become Beijing’s concern, too.

Inflation is bubbling and consumer unhappiness is rising, as the price of imports chugs higher as measured in China’s currency, the yuan. At the same time, international investors are wary of the yuan because of the government’s close management of the currency.

The result: a shift in the discussion inside the Chinese government, where advocates of export-led development have typically held sway. The change could make it tougher for those advocates to fend off U.S. pressure.

Leading members of Congress have charged that China’s currency policy directly siphons away American jobs, and last fall the House approved legislation that would tax Chinese imports to offset any edge provided by the low value of the currency.

President Obama has cited China’s exchange rate as an obstacle to a healthier world economy, and critics of globalization say the policy lets the world’s second-largest economy in effect undermine potential competitors in countries such as India and Brazil. The International Monetary Fund has chimed in, reporting that the yuan is significantly below its true value.

All that political pressure, however, has yielded only modest change in a country where tens of millions of workers depend on an industrial complex built around churning out cost-competitive goods, be they blue jeans, bicycles or iPods.

What is changing now is the growing recognition in China that its cut-rate currency has another side: rising local costs and other effects that could take a toll on the social order prized by the country’s political leadership.

By setting a low exchange rate, rather than letting market forces set the yuan’s value like that of other major currencies, China is inviting higher inflation because imported fuel and food are artificially expensive. Government-set fuel prices have increased twice this year, prompting a truckers strike in Shanghai last month. Food prices are also rising — particularly sensitive in a country where per capita income is just $3,000 a year and tens of millions remain in poverty. Overall inflation, at 5.4 percent, is well beyond the government target.

The managed exchange rate is also limiting the international use of the renminbi, also known as the yuan, frustrating Beijing’s commercial and political aspirations. Moreover, the currency policy is resulting in a surplus of foreign exchange holdings, much of which is locked away in low-yield — and some Chinese argue risky — U.S. Treasury securities instead of helping develop the country.

There has been no announced change in China’s currency policy, but the People’s Bank of China allowed the currency to rise more quickly in April than previous months, and on Friday set its target level for the yuan at 6.49 — the lowest since the early 1990s.

Read more at The Washington Post.