CHINESE ECONOMICS

Whether the Chinese decision earlier this month to revalue its currency was a political move aimed at pacifying the United States or a genuine attempt at the beginnings of economic reform, the slight increase in the yuan is likely to have little impact on American consumers and workers. Of much bigger concern economically is China’s failure to crack down on piracy, the illegal duplication of movies, CDs and other products, and dumping, the flooding of markets with cheap Chinese goods.

The yuan was believed to be undervalued, giving Chinese exporters an unfair advantage in world markets because their goods were cheaper than those from other countries. Some have blamed the undervalued yuan for large losses of manufacturing jobs in the United States and other developed countries. The cheap yuan is also blamed for the United States’ record trade deficit with China, which reached $162 billion last year.

U.S. officials had called on the Chinese government to raise the value of the yuan by 10 percent. It responded on July 21 by raising it by 2 percent, its first revaluation in nearly a decade. The currency will also be pegged to a basket of foreign currencies, although the government declined to name which ones, rather than just the U.S. dollar. The yuan will be allowed to “float” although government officials will control this too by ensuring that the currency’s value does not change by more than 0.3 percent in a day. Despite complaints that China manages its currencies, which all countries do, wide swings in the value of the yuan would be bad for the United States and other countries.

The slight increase in the value of yuan could mean that Chinese goods are more expensive, although such a small change is not likely to be noticed by consumers. The move means that American goods will be more competitive, but again the difference is slight.

The bigger impact may be in financial markets where speculators who believe that the yuan will increase in value can make this happen by buying up a lot of the currency. If more money is invested in China and other Asian countries, where currency values are also likely to rise, foreign investors are likely to buy fewer U.S. Treasury bills. This could lead to an increase in interest rates here, which is good for investors but bad for homebuyers and those with a lot of debt.

Even if the revaluing of the yuan is good news, major economic problems remain. Last year, for example, developed countries launched 31 dumping investigations against China, a 20 percent increase over the previous year. The European Union is currently investigating whether cheap shoes from China are being dumped on the market there and earlier this year U.S. trade officials imposed duties on shrimp from China and other countries accused of dumping the shellfish here.

Earlier this month, President Bush named Chris Israel, a former Time Warner executive, as the first Coordinator for International Intellectual Property Enforcement. As the country’s first anti-piracy chief, Mr. Israel’s first priority it to crack down on China where an estimated 90 per cent of movies and music in circulation are illegal copies.

China may have taken a small step in modernizing its economy and appeasing its critics, but many more remain.