Opinion

Yuan has little to learn from the yen

By Mei Xinyu (China Daily)
Updated: 2010-06-15 09:52

Like Japan in the early-to-mid 1980s, China is also a roaring economy with a continuous large trade surplus and foreign exchange reserves, a buoyant property sector and a currency under increasing pressure from the US.

Back then, when the US ran a huge trade deficit with Japan, Washington forced the Asian power to drastically revalue its currency, the yen, as agreed upon in the Plaza Accord of 1985. The exchange rate value of the yen versus the dollar appreciated by 51 percent from 1985 to 1987 after the Plaza Accord was enacted.

Japan, however, experienced a prolonged bubble economy and entered a decade-long recession after the bubble burst in 1990. Till today, Japan's economy has not recovered completely from the recession.

Similarities between China's current economy and that of Japan in the 1980s raise fears that the nation will follow in Japan's footprints and step down the same road. And if so, China's economy will more likely to be hard hit than Japan owing to its current core competitiveness in the manufacturing industry, export sector and international balance of payments as none of it is comparable with that of Japan during the Plaza Accord.

Japan had entered the post-industrial phase and was already in the list of developed countries at that time, while China is still on the road of industrialization.

Japan's trade surplus gained from exporting products with independent intellectual property rights by its domestic enterprises, while China's huge trade surplus - the primary reason for the pressure of yuan appreciation - to a large extent, is actually coming from the processing trade by foreign enterprises. China can only gain a little money as processing fees with bulk of the money going as added value to companies of other countries selling the product.

As a large country with one-fifth of the world's population, China's fundamental interest lies in the real economy, particularly in the manufacturing industry. This is because manufacturing industry can provide enough jobs to Chinese people and also widely distribute the benefits of economic growth.

An appreciation of the yuan before China is truly prosperous will hamper the sustainable development of the manufacturing industry in the country.

There is no denying that with a trend toward a stronger yuan in the long run, China will improve the yuan exchange rate formation system and gradually adopt the managed floating exchange rate system. However, a sharp revaluation of the yuan would lead to a disastrous outcome for China in the following aspects.

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First, it would seriously hurt exporters in China. The results of the "yuan stress test" showed that corporate profits of Chinese exporters, especially the manufacturers of household appliances, vehicles and cell phones may plunge by between 30 percent and up to 50 percent if the yuan appreciates 3 percent against the US dollar.

Second, a rapid rise in the yuan exchange rate would impact the industrial upgrading. Traditional labor-intensive industries cannot bear the great pressure of the appreciation of the yuan due to their slim profits. In addition, exporters of power stations, ships, railways and communication equipment face the highest risk due to their long production cycle. The yuan exchange rate losses during 2007 and 2008 actually cut the profits of these exporters by 30 to 40 percent.

The exchange rate is a sovereign issue of each country, and China should reform the yuan exchange rate regime only at its own pace.

Mei Xinyu is researcher with the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.