Predictably the world applauded China’s announcement that it is ending its currency’s 2-year peg to the dollar even as China insisted that a stronger yuan can’t solve the world’s economic problems.
If history is any indicator, for the short and the mid terms, an appreciating yuan is likely to exacerbate the problems.
Look back to the mid-1980s when Japan was under intense pressure to let the yen rise based on the simplistic premise that a high yen would make U.S. exports more competitive and stop Japan’s auto industry from destroying Detroit. So much false hope was placed on a higher yen that Japanese joked that they would let the yen rise from 120 to 100 to the dollar and take California in exchange.
That joke wasn’t far off the mark. Armed with a strong yen Japanese investors started buying up America. Everything from Wilshire Boulevard highrises to Las Vegas casinos to the Rockefeller Center were snapped up by Japanese corporations. U.S. banks, manufacturers and movie studios became subsidiaries of Japanese banks and electronics firms.
And the high yen did nothing for Detroit. Japanese carmakers not only continued to expand their mass-market shares throughout the 1980s and 1990s but added the pricier Lexus, Acura and Infiniti lines to take a big share of the luxury market.
The reaction was predictable. American workers became convinced that an economic Pearl Harbor was at hand. Sledge hammers were taken to Toyotas and Hondas and Japan-bashing became the issue of choice among demagogues.
Ultimately, Japan itself was ruined by the “yen shocks” resulting from the powerful pressures to keep the yen high, even through resort to central-bank manipulations. Ultimately, the expectation that the yen would keep rising attracted so much buying of the yen that Japanese interest rates slid to zero, sapping profit from bank lending and sending Japan into 15-years of economic stagnation.
Will the same thing happen now with the yuan and China?
Fortunately, Beijing’s bosses are more thick-skinned than Japan’s acquiescent leaders. They aren’t likely to let the yuan appreciate much quickly. They know the dangers of scaring their manufacturers with the overblown specter of being priced out of their export markets. In reality, though, they have no choice but to let the yuan rise to make affordable the cost of the resources China needs to fuel ever higher consumption as it evolve from a bicycle economy to an automobile lifestyle.
Chinese companies will be buying up foreign oil companies, mines and agri-businesses to supply growing domestic demand, and a higher yuan will help. A rising yuan will also ease the persistent upward pressures on domestic assets. Instead of chasing overpriced Shanghai apartments, China’s affluents will be roaming the better neighborhoods of California and New York for foreclosures and other distressed real estate. China’s new globetrotters will also spend on hotel rooms, restaurant meals and brand-name fashions.
American workers in the manufacturing sector won’t be helped much directly as few U.S. companies are geared up to export consumer goods to China. But indirectly and in the long terms workers will feel the trickle-down effect from the increased demand for U.S. real estate, travel services and stocks. But any such benefit depends on how well China’s rulers continue to resist U.S. pressures for rapid yuan appreciation and the resulting shocks which could send not only China but the rest of the world into another economic tailspin.
