Thursday, October 7, 2010

China Wants to Avoid Japan's Fate And Will Not and Cannot Let Yuan Appreciate

While the U.S. is making lots of noise against China's Yuan policy, it seems that they forget to mention that the last time they did the same to another country, namely, Japan, the consequences were a disaster for the other country.

Well, China does not want to repeat the Japanese fate. The similarities are significant.

Claudia Trevisan writes a fantastic article on the subject (in Portuguese).

Japan's decision to succumb to U.S. pressure and accept the appreciation of its currency in 1985 is one of the main reasons given by many of the Chinese authorities to resist the global chorus in favor of the yuan appreciation.

Daokui Li, an economist and member of the monetary policy committee of the People's Bank of China, warned: "China will not repeat the mistake of Japan,". After allowing the appreciation of the yen, Japan entered a period of speculation that led to the formation of asset bubbles. When they burst in the early '90s, the country plunged into the "lost decade" of which as we know, it has yet to fully recover.

The exchange regime change in Japan occurred at the Plaza Agreement, signed in September 1985 in New York by countries that made up the G5, U.S., Japan, Germany, France and England. The pact resulted from the coordinated action among the major industrialized economies, a movement similar to that now advocated by the Brazilian finance minister, Guido Mantega, to address the threat of a "currency war". The objective of the Plaza Agreement was devaluation of the U.S. currency, as the U.S. had accumulated large trade deficits (sounds familiar?), and appreciate the yen. The Japanese currency was quoted at that time to 240 per dollar. In 1987, he was already at 130 per dollar. Currently, it tardes around 82.

Mei Xinyu, the official China Daily economist of the Chinese Academy of International Trade and Economic Cooperation attached to the Ministry of Commerce wrote: "The appreciation of the yuan before China will be truly prosperous undermine sustainable development of manufacturing industry,".

China would suffer more than Japan in the event of significant appreciation of the currency, due to the different stages of their economies. "Japan had entered the post-industrial and has integrated the list of developed countries at that time (around 1985), while China still runs through the path of industrialization."

But as China today, Japan had 80 years of large trade surpluses with the United States, accumulating foreign reserves and used savings to buy Treasury securities in the U.S.. And like China today, Japan also emerged as a country capable of challenging the U.S. position as a major world power. This causes some people in Beijing to think of conspiracy theories, in which the U.S.' pressure for revaluation of the yuan is a strategy to undermine China's rise.
The other factor that the Chinese should consider of course is if the major world powers go broke, who will they sell to? The Chinese are also walking a tight rope with their actions.

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