The impact of Yuan Revaluation

Posted by admin on April 11, 2010 under Articles | Be the First to Comment

Asia’s growth is impacting global financial relations, but the debate about the Chinese currency may be oversimplified.
Photo Credit: Flickr
As China’s overall trade surplus has continued to exceed market expectations, the United States is campaigning to persuade China to increase the value of its currency. Photo Credit: Flickr
The battle over revaluing the Yuan has big implications for the US economy, US-China relations, and the US’s global leadership role. As China’s overall trade surplus continued to exceed market expectations and reach record highs through 2006, US Treasury Secretary Henry Paulson, picking up where his predecessor John Snow left off, began a campaign of trying to persuade China to increase the value of its currency. The argument is that China is keeping the value of its currency low so that it can boost its exports. China allowed its currency to strengthen by 2.1 percent in 2005 as a response to these calls.

Not only does this debate mirror US concerns during the 1980s about the Japanese yen, but it is also riddled with the same oversimplifications. US pressure on Japan during the 1980s caused resentment in Japan toward the US but did little to improve the US trade deficit. Some even blamed the US for the subsequent real estate bubble that occurred in Japan.

Japan risks going bankrupt

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TOKYO – GREECE’S debt problems may currently be in the spotlight but Japan is walking its own financial tightrope, analysts say, with a public debt mountain bigger than that of any other industrialised nation.

Public debt is expected to hit 200 per cent of GDP in the next year as the government tries to spend its way out of the economic doldrums despite plummeting tax revenues and soaring welfare costs for its ageing population.

Based on fiscal 2010′s nominal GDP of 475 trillion yen (S$7.09 trillion), Japan’s debt is estimated to reach around 950 trillion yen – or roughly 7.5 million yen per person.

Japan ‘can’t finance’ its record trillion-dollar budget passed in March for the coming year as it tries to stimulate its fragile economy, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. ‘Japan’s revenue is roughly 37 trillion yen and debt is 44 trillion yen in fiscal 2010,’ he said. ‘Its debt to budget ratio is more than 50 per cent.’ Without issuing more government bonds, Japan ‘would go bankrupt by 2011.’

Despite crawling out of a severe year-long recession in 2009, Japan’s recovery remains fragile with deflation, high public debt and weak domestic demand all concerns for policymakers. Japan was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, hitting corporate earnings and prompting consumers to put off purchases in the hope of further price drops. Its huge public debt is a legacy of massive stimulus spending during the economic ‘lost decade’ of the 1990s, as well as a series of pump-priming packages to tackle the recession which began in 2008.

But while Japan’s risk of a Greek-style debt crisis is seen as much less likely, the event of risk becoming reality would be devastating, say analysts who question how long the government can continue its dependence on issuing public debt. — AF