The following guest post was contributed by Ian Lamont, an MIT Sloan Fellow. He was previously the managing editor of the Industry Standard, and has also researched China’s state-run media and communications policies.
For years, China has been subject to enormous external pressure to increase the value of its currency, or let it float on the open market. While doing so might relieve pressure on foreign economies by boosting their exports and reducing trade deficits, it runs counter to Beijing’s domestic priorities, which involve doing everything it can to preserve economic growth and domestic stability, and by extension, its hold on political power.
All countries exploit the dynamics between their political and economic systems. But China’s situation is exceptional. For three decades, the government of the People’s Republic of China has perpetuated a grand political dream, claiming a single-party political mandate from the Communist ideals espoused by Mao Zedong, while simultaneously drawing power from the capitalist canon. Beijing has been able to pull it off, largely through the promise of spreading wealth and opportunities to even the poorest of villages and maintaining benefits for cadres and workers in state-owned enterprises which cannot easily be absorbed into the capitalist system. A high rate of GDP growth is required year after year to maintain this state of affairs.
A sudden change in the value of the Yuan could have the effect of throwing a wrench into the works, potentially setting off a chain reaction of factory closures and layoffs across the interconnected networks that drive China’s export-oriented economy. In the short term, China might be able manipulate legislation, the banking sector, and welfare levers to prop up key industries or regions. But in the long term, it is uncertain if these steps would be enough to preserve social stability or continued loyalty to the Communist Party.
What sorts of domestic consequences would result from a slight uptick in the value of the Yuan? The currency is now trading at about 6.7 renminbi to the U.S. dollar. At the very least, Chinese exports would become slightly more expensive to foreign buyers. The resulting drop in Chinese exports would put marginal factories out of business and put their workers on the streets. Other companies would shift low-wage manufacturing to countries such as Vietnam and Sri Lanka. In the industrial parks around Shenzhen, the unemployed could be reabsorbed into the local manufacturing economy. In remote interior provinces, where economic institutions are less developed, there would be fewer opportunities, and a corresponding rise in poverty, anti-government feeling, and isolated “mass incidents.”
But what would happen in the case of extreme economic disruption, prompted by a sharp change in the exchange rate, the currency openly floating on the world market, or some other unforeseen effect of a revaluation? The social and political turmoil unleashed by a sharp, sudden slowdown of the Chinese economy could potentially lead to Tiananmen Square-scale protests, widespread domestic instability, and an exodus of migrants or refugees to neighboring countries and overseas.
China is not attempting to hide its fears. “Any significant appreciation of the renminbi will erode China’s export competitiveness overnight and impact the livelihood of tens of millions of workers,” notes an editorial authored by the pro-government China Daily and republished in China’s state-run news agency in May. The essay further describes two economic goals: To maintain a target GDP growth of 8 percent per year (a level it has achieved nearly every year for the past two decades) and contain China’s consumer price index (which it tries to keep under 3%).
Additional factors may influence China’s currency policy in the short term. One concern is foreign policy, such as relations with key trading partners. Another is nationalist sentiment, which the Communist government has manipulated to support its own hold on power. Economic injustices inflicted by foreign powers on China in the 19th and early 20th centuries — such as the treaty ports system — still play a role in China’s nationalist propaganda. These humiliations require the current generation of Chinese leaders to tread carefully around policy changes that could be viewed as kowtowing to foreign demands.
So, for foreign governments, companies, and labor groups expecting China to allow its currency to appreciate, there may be no significant movement until China’s back is truly against the wall — or the leadership in Beijing can find a face-saving way to convincingly portray a revaluation as an advance demanded by its people, as opposed to a policy shift dictated by foreigners. In addition, China’s trading partners need to be aware that a change in the value of the Yuan will not by itself erase their trade deficits or reduce their dependence on cheap manufactured goods from abroad. Such a shift may even lead to problems that have long-lasting implications for China’s people and the global economy.