Wednesday, January 13, 2010

Beijing Economic Policy Rocks the Global Boat

In order to stimulate its economy, Beijing re-pegged its currency to the dollar. Doing so, however, has not only increased global economic imbalances -- it could ultimately harm China itself.

It was just over a year ago that Huang Fajing, 55, was struggling to keep his company afloat. The president of lighter manufacturer Wenzhou Rifeng Lighters Co., Huang was forced to send his roughly 500 workers home early as a result of the global economic crisis. He himself had little to do but watch television in his luxury apartment in the eastern Chinese industrial city of Wenzhou.

Now, a year later, business is back in full swing in Wenzhou's factories, which supply the world with inexpensive goods, from buttons to electric cables to, of course, lighters. At Rifeng, workers wearing gray uniforms press tiny metal parts into the lighter shells, which are then sold to smokers in Europe, the United States and Japan.

Given Huang's slim profit margins of no more than 5 percent, Huang has carefully fine-tuned the work performed by the young men and women in his factory to eliminate unnecessary movements. But the fact that he has survived the crisis at all is largely thanks to his government -- and the decision in the summer of 2008 to once again peg the exchange rate of the yuan to the US dollar.

The Crutch

Beijing uses this policy to ensure that the country's factories can continue to export their products at ever cheaper prices. Because the value of the dollar has declined sharply, the yuan has fallen along with it, losing up to 17 percent of its value against the euro in 2009. At the same time, this artificially low exchange rate serves as a crutch that enables the Chinese government to protect many of its export businesses against failure. It is the only reason why exports declined by only 1.2 percent in November 2009, relative to the same month a year earlier, allowing China to replace Germany as the world's top export economy.

Many in the West see the rising economic power as an enormous engine of growth that is helping to lift the rest of the world out of the crisis. The government in Beijing has jump-started the domestic economy with a gigantic economic stimulus package worth four trillion yuan, or about €400 billion ($580 billion), which has led to investments in road, railway and airport construction throughout the country. Generous tax rebates to stimulate consumption, particularly of big-ticket items like cars, were also part of the package.

But China, with its enormous export economy, has in fact expanded global imbalances with its aggressive exchange rate strategy -- the same kind of imbalances that were partly responsible for the most recent financial crisis and, as a result, ought to be corrected.

China also risks triggering new, long-term trade conflicts, particularly with its neighbors. Since the beginning of the economic crisis, China has been diverting some of its exports to neighboring countries and away from Europe and the US, where sales have declined.

To read more: http://www.spiegel.de/international/world/0,1518,671310,00.html

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