Commentary: Who Wants The Yuan To Rise?

Why multinationals aren't joining the U.S. campaign

Beijing, please do something -- anything! -- about your rigid currency regime and let the yuan appreciate. That's the message Washington, Tokyo, London and others have been blasting at the Chinese government for months now. With politicians worldwide calling on China to revalue the yuan, you'd think the big corporations headquartered in their countries might be just as adamant. But you'd be wrong. Most Western multinationals with operations in China couldn't care less about currency reform; they like the yuan right where it is, even if economists figure it's undervalued by as much as 30%.

To understand why, you have to get beyond the political jousting and crunch a few numbers. About 55% of China's $593 billion in global exports last year came from foreign-run enterprises. The $160 billion-plus U.S. trade deficit with China gets a lot of press, but China imported $561 billion worth of goods last year -- so its overall trade surplus stood at a relatively modest $32 billion. Consider, too, that $60 billion in foreign direct investment streamed into China in 2004. A weaker yuan means cheaper land and labor and more competitively priced China-made exports. "Given the importance of China as our production base, we don't want a sudden change in the value of the yuan," says a senior executive with Seoul-based LG Electronics, which makes everything from microwave ovens to mobile phones in China, sourcing 90% of its parts locally and exporting 60% of its production.

Major U.S. business groups have come to nearly the same conclusion. "We don't really have a point of view" on revaluation, says Emory Williams, chairman of the American Chamber of Commerce in Beijing and chief executive of SureBlock Co., a construction materials company. Translation: Its biggest members don't give a hoot. And the U.S.-based National Association of Manufacturers pulled out of a campaign to sanction China for violating trade laws by currency manipulation, in part because its members have sunk billions into the mainland.

That's not to say no one in U.S. or European business is worried about the yuan. Plenty of smaller companies have been devastated by competition from Chinese imports. Think U.S. furniture manufacturers, developing-nation textile makers, and European electronics suppliers. If they haven't transferred at least some production to China, they often simply can't beat the prices offered by Chinese rivals.

But multinationals that both source and sell in China have little cause for concern. For the biggest companies, a 5% to 10% appreciation of the yuan -- which many economists expect before too long -- would be a wash. A stronger yuan would lower costs by making imported parts cheaper but increase the selling price (and, presumably, curb demand) for products made in China. "We are a global company with a lot of manufacturing and research and development in China, and we also sell a lot there," notes Motorola Inc. (MOT ) CEO Edward J. Zander, who says his company isn't lobbying for Chinese currency reform.

For now, this means Beijing is not facing the kind of pressure most likely to force a revaluation. Sure, Washington and others will continue to jawbone the Chinese. But unless the big multinationals start to squawk -- which is unlikely given the investment pouring into China -- don't look for any more dramatic action such as punitive tariffs against Chinese exports.

China does pose a threat to the multinationals. They are constantly griping about intellectual property theft, tax policies that favor Chinese competitors, and easy credit to locals from Chinese banks -- which could devastate margins by creating overcapacity in autos, steel, and appliances. On top of that, emerging brands such as Huawei Technologies, Haier, Lenovo, and ZTE are sure to step up their exports and challenge the dominance of Western giants. So there's plenty for big corporations to fret about. It's just that a cheap yuan is far from the top of the list.

By Brian Bremner with Andy Reinhardt in Cannes and Moon Ihlwan in Seoul

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