Richard Gottlieb

You, me and the Chinese Yuan

Hold on to your hat because the Obama administration may be looking for a fight with China over their current valuation of the Yuan. We in Toy Nation have a stake in the coming fight over the valuation of the Chinese Yuan. If the Yuan goes up in value, toy prices go up as well. 

According to a Wall Street Journal article entitled “U.S. Stance on the Yuan Gets Tougher,” “President Barack Obama's nominee for Treasury secretary [Timothy Geithner] accused China on Thursday of ‘manipulating’ its currency, a sharp rhetorical break from the Bush administration's approach to Beijing's controversial exchange-rate policy.”

Geithner’s use of the term “manipulating” was not a casual choice. It could indicate that the US plans to charge China with purposely manipulating its currency so that it remains artificially weaker and therefore allows them to get an unfair trade advantage. 

If that is the case, according to the New York Times in an article, “Geithner hints at Harder Line on Chinese Trade,” “…the administration is required by a 20-year-old trade law to report to Congress on exchange rate issues. Such a finding would begin a legal process that starts with diplomacy and could end with the imposition of trade barriers like tariffs. The objective would be to persuade China to let the value of its currency, the Yuan, freely float — a move that would let its value rise and would increase the cost of its exports.”

The Chinese will, of course, push back. They need to keep unemployment low due to worries about social unrest. A rise in the value of the Yuan would mean fewer exports and as a result more unemployment. As the San Francisco Chronicle puts it in an article entitled “In China Out of Work Migrants Desterilizing,”

Some observers are worried that an army of unemployed [Chinese] workers could spark widespread social unrest…. It is uncertain whether millions of unemployed migrants will protest on city streets, flood rural provinces with surplus labor, or remain in urban areas illegally, unwanted and regarded with suspicion by local residents.

"The next couple of months will be crucial. No one knows how many (factories) will be (left) open, how many migrants can have a job," said Peng. "If China can successfully handle this economic crisis and make most of the companies remain open," there will be little social unrest.

There is that old African proverb: “When the elephants dance, it’s best to get out of the way.’’ In the mean time, a China + 1 policy may make a lot of sense.  In other words, continue to produce in China but, just in case, have one production facility somewhere else.

Posted by Richard Gottlieb on January 23, 2009 | Comments (0)