When China revalued its currency in 2005, the shift failed to balance trade with the U.S. The next move, which might come within months, may be more successful.
The main difference is the change in the world economy wrought by the worst financial crisis since the Great Depression. U.S. consumers, shaken by a more than doubling of the unemployment rate to 9.7 percent in the last three years, are saving more and spending less freely, including on imports. China’s leaders are moving to lessen their economy’s dependence on exports after a collapse in foreign demand chopped one-third from the country’s record 2008 trade surplus of $298.1 billion.
“The post-crisis world has left us with a highly challenged U.S. consumer,” said Jim O’Neill, chief global economist for Goldman Sachs Group Inc. in London. “The crisis has forced the Chinese to shift to a world in which domestic demand is going to drive growth.”
Companies including Yum! Brands Inc., the Louisville, Kentucky-based owner of Pizza Hut, and Coca-Cola Co., the world’s largest soft-drink maker, are expanding in China to attract new customers. A 5 percent revaluation of the yuan would improve the U.S. deficit, at $378.6 billion in 2009, by about a fifth and narrow the U.S. trade gap with China by $61 billion, according to a study by economist Joseph Francois of Johannes Kepler University in Linz, Austria.
A lower Chinese trade surplus and U.S. deficit would be good for the global economy, easing protectionist pressures and reducing the risk of another boom-bust cycle driven by excess savings in China and debt-driven consumption in America.
“It’s healthier in the long run for the world economy to have more-balanced trade and growth,” said Allen Sinai, chief global economist at Decision Economics Inc. in New York.
Some Chinese executives agree. Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd., told reporters last month that a stronger yuan would boost consumer purchasing power. Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group Co. in central Hunan province, said in a March 12 interview it would cut import costs.
China will allow the renminbi to gain this year, according to all 19 analysts surveyed by Bloomberg News this month. Twelve are forecasting a move by June 30, making it cheaper for Chinese consumers to buy foreign products and pushing up the cost of the country’s own goods in international markets. Renminbi is another term used for China’s currency.
Yuan forwards gained 0.1 percent today, according to data compiled by Bloomberg, amid a regional Asian currency rally on signs of strengthening growth. Twelve-month nondeliverable forwards stood at 6.6068 per dollar as of 9:54 a.m. in Hong Kong, after touching a three-month high of 6.593 last week. The contracts reflect bets the currency will strengthen 3.3 percent.
U.S. Treasury Secretary Timothy F. Geithner maintained pressure on China to let the yuan appreciate after a meeting with finance chiefs from the Group of 20 nations in Washington April 23. “It’s obviously important to the world as a whole” that the country makes the shift, he said at a press briefing.
Some Asian currencies have already begun to rise in anticipation of China’s shift. Singapore unexpectedly revalued its exchange rate on April 14, saying it will seek “modest and gradual appreciation” in the local dollar.
The People’s Bank of China, the country’s central bank, said it wanted to promote “the basic equilibrium of the balance of payments” when it announced a 2.1 percent revaluation of the yuan from 8.28 to the dollar on July 21, 2005. It subsequently allowed the currency to rise through July 2008, when it pegged it at 6.83 to protect its exporters from the worldwide crisis.
The 21 percent advance from 2005 to 2008 didn’t prevent world trade from becoming more lopsided. China’s surplus nearly tripled, to a record $298.1 billion in 2008 from $102 billion in 2005. The U.S. deficit barely fell, to $696 billion from $715.3 billion, according to data from the U.S. Census Bureau.
It took the worst global recession since World War II to achieve a better balance, as U.S. consumption declined for the first time in a generation and Chinese exports tumbled 16 percent in 2009 from the previous year. China’s trade surplus plunged to $196.1 billion last year, while the U.S. deficit nosedived to $378.6 billion.
While some of the declines will be unwound as U.S. spending and trade among nations revive, about a third of the recent narrowing is permanent and the imbalances will return to their 2004 levels, Piero Ghezzi, head of emerging-markets research at Barclays Capital in London, said in an April 12 note to clients.
Global imbalances -- the sum of all current-account balances as a percentage of the world economy -- will hold steady at about 4.5 percent in 2010 and 2011, down from a peak of 5.6 percent in 2008, the World Bank forecast in January. China’s current-account surplus -- the broadest measure of trade --- will decline to about 4 percent of its economy in 2010 and 2011 from 5.8 percent in 2009, the bank projected.
“There are no signs that we are going back to a pre-2008 world,” Ghezzi said.
U.S. consumers aren’t going to return to their free- spending, debt-driven ways, even though consumption will pick up, Sinai said. He sees household expenditures rising by 2.5 percent this year and 3 percent in 2011, after falling 0.6 percent last year. Such spending grew by an average 3.3 percent from 1990 to the start of the recession at the end of 2007.
The collapse of the housing market has robbed Americans of spending power as prices dropped 28 percent since mid-2006, according to the S&P/Case-Shiller index. Homeowners withdrew about $11 billion in equity from their houses when they refinanced conventional prime-credit mortgages in the fourth quarter, the lowest in nine years, according to Freddie Mac, the McLean, Virginia-based government-supported mortgage buyer.
President Barack Obama has pledged to reorient the U.S. economy away from the bubble-driven consumption of the past toward exports and investment. He’s increasing government-backed financing for small businesses and using tax credits to encourage investment in alternative energy.
His Chinese counterpart is trying to shift his nation’s economy in the opposite direction.
“Adjusting the economic structure is a very important task,” President Hu Jintao said on April 15 in Brazil. Officials “will make special efforts in expanding domestic demand and increasing consumer spending.”
China’s 4 trillion yuan ($586 billion) stimulus has helped accelerate development of the nation’s interior, which historically has been left behind by the export-driven coastal regions. Urban fixed-asset investment in China’s central and western areas surged 36 percent and 35 percent last year, respectively, outpacing the east coast’s 24 percent growth.
China’s gross domestic product, which is projected to overtake Japan’s this year as the world’s second largest, surged 11.9 percent in the first quarter compared with a year earlier. Investment contributed 6.9 percentage points to growth, consumption accounted for 6.2 points and net exports deducted 1.2 points, according to China’s National Bureau of Statistics.
The country posted its first trade deficit in six years in March as imports rose 66 percent from a year ago, the most since records began, according to the Chinese customs bureau.
“The crisis has driven home the point that China has maxed out the benefits of trade, so policy makers are trying to refocus the economy towards domestic stimulus,” said Wang Qing, Greater China economist at Morgan Stanley in Hong Kong.
Unconvinced on Impact
Not every analyst is convinced rebalancing is for real this time. Tim Adams, who was U.S. treasury undersecretary when the yuan was revalued in 2005, said he doesn’t think China will allow the currency to rise fast enough to have a meaningful impact on the imbalances.
He also voiced doubts that China and the U.S. will make the painful choices needed to restructure their respective economies to help make the yuan appreciation succeed.
The export sector remains powerful in China, while there’s little appetite in the U.S. to tackle the current fiscal year’s projected record $1.6 trillion federal budget deficit, said Adams, a managing director at the Lindsey Group, a Fairfax, Virginia-based investment consultant.
Foreign companies, for their part, are positioning themselves for increased demand in China on a stronger yuan and shift in the focus of economic growth more toward local consumption. Yum, which also owns the Taco Bell and KFC fast- food chains, plans to open about 500 restaurants there this year, it said April 14.
Coca-Cola is also expanding through the introduction of new products such as Yuan Ye jasmine tea, according to Muhtar Kent, chairman and chief executive officer of the Atlanta-based company.
“We are just getting started in China and remain resolute in our commitment to invest for solid long-term growth,” Kent told analysts on an April 20 earnings call.
Tesco Plc, the U.K.’s largest retailer, will spend 2.5 billion pounds ($3.8 billion) over five years in China, opening shops there as its share of the domestic grocery market plateaus, the Cheshunt, England-based company said April 20. Hermes International SCA, the Paris maker of luxury handbags and silk ties, plans to open its first Chinese store under the Shang Xia brand in September, Chief Executive Officer Patrick Thomas said in a March 25 interview.
“The renminbi will resume its appreciation,” said Kevin Lai, an economist in Hong Kong at Daiwa Capital Markets Hong Kong Ltd. “You will see a more substantial rebalancing process kick-started.”