[China] Yuan can lift Asia out of poverty

from the Standard

William Pesek

Funny how the biggest economic story last year - China's currency - is barely on investors' radar screens in 2006.

Those who want China to boost the yuan's value haven't changed their minds. Rather, they ran into China's other Great Wall: a Communist Party that won't budge. The party made it clear that last year's 2.1 percent upward revaluation won't be repeated for quite a while.

It was always hard to keep a straight face given US hypocrisy surrounding the issue. For all the hype over China's potential, it's still a developing economy with serious problems, including a fragile financial system, widespread poverty and many risks of social instability. Amid such challenges, expect the government to take its time strengthening the yuan.

Yet there's an underappreciated reason why China should alter its currency policy: its effect on Asia's poor. Poverty reduction in China is very important, but it's hard not to notice that Asia's No2 economy is working to narrow its gap between rich and poor at the expense of the rest of the region.

"The relationship between exchange rates and poverty reduction is not so direct, but a more flexible Chinese exchange rate would benefit Asia," said Haruhiko Kuroda, president of the Asian Development Bank, in an interview in Manila. "It would make a difference."

A stronger yuan could have significant trickle-down effects around the region. Along with increasing China's purchasing power, it would allow some of the foreign direct investment rushing to China to flow to other economies. It also might encourage Asia to let currencies rise and get out of the trap of export dependence.

If China is serious about being a responsible neighbor, and fostering better economic ties in Asia, altering its currency policy would be a good idea. Not because the United States or Japan wants it, but because Asia's developing economies need it.

Admittedly, China's 1.3 billion people face enormous challenges amid the transition from socialism to capitalism. How officials in Beijing handle it will say much about its future role in the global economy, and they should tread carefully. A financial crisis in China would do more harm to global growth than an undervalued currency.

It's all about striking a balance. China should avoid the 20 percent or 30 percent revaluation many analysts call for. Still, letting the yuan rise gradually would increase Chinese purchasing power, creating a major source of demand.

With Japan walking in place until just recently, China has become Asia's locomotive. The region's poor and investors will benefit if Chinese consumers can afford to buy more overseas and Asia has a more level playing field.

If China is to lead in Asia some day, it should consider trends in the Philippines, where high poverty rates remain a clear danger to Asia's 13th- biggest economy. It expanded 5.1 percent last year, and the government says gross domestic product must grow at least 6 percent to create jobs. A third of the nation's 86 million people live on less than US$1 (HK$7.8) a day.

The last thing Philippines manufacturing industries - which the government hopes will provide many of those jobs - need is an economic power like China maintaining a high level of artificial competitiveness.

The issue is more than academic for investors looking for the next hot investment destination. Unless poverty rates fall in the Philippines or elsewhere in Asia the region won't reach its full potential.

A stronger yuan "would bring more macroeconomic stability to Asia," said Kuroda, a former Japanese Ministry of Finance official.

The question is one of fairness: If a big developing economy maintains an undervalued currency, isn't that a disguised subsidy that its smaller peers don't have?

The answer, of course, is yes, though the argument has been framed around how the yuan affects multinational companies and the US economy. The debate has been muddied by politics, most of it disingenuous.

Among the most memorable comments Paul O'Neill uttered before he was fired as US Treasury secretary in December 2002 was that good chief executive officers "don't live and die on exchange rates." In other words, companies bellyaching about currencies are looking for government help. Perhaps the United States should be more competitive and not blame China.

One reason O'Neill was replaced was his reluctance to strong-arm China to boost its currency. O'Neill knew something that others in George WBush's administration didn't: US imbalances are the product of Americans living beyond their means, not foreign exchange policies.

Even so, the United States likes to think that its record trade deficit is Asia's fault. American policy makers say excess savings in this region are a major cause of US imbalances. It's an odd view that almost implies US consumers are shopping altruistically for the good of the world.

China should indeed be letting the yuan rise, though not to help the United States reduce its excesses. Rather, doing so would give other Asian economies a fighting chance of getting their share of the region's growth.