Hugh Metcalf, senior economics lecturer at Newcastle University Business School, sheds light on the factors affecting China’s currency.

Hugh Metcalf, senior economics lecturer at Newcastle University Business School, sheds light on the factors affecting China’s currency.

Although the Chinese yuan (or renminbi) is tied to the US dollar, there is significant pressure from around the world on the government to allow the currency to appreciate and thus reduce the “unfair” advantage enjoyed by Chinese exports.

The phenomenon of governments managing their currency is not unique to China. Japan, for example, will buy or sell yen in order to keep the currency within a certain range. The difference is that China’s currency is not freely floating – only a small number of corporations are allowed to trade it.

The Chinese government is well aware of the complaints from the US and others and has allowed a modicum of floating: the yuan has appreciated from 13.4 US cents two years ago to 14.6 cents today. There is some benefit for China here: the country is a major importer of raw materials, most of which are priced in dollars, so any appreciation in the renminbi makes those imports cheaper. And a greater share of these imports is now staying inside China rather than being re-exported.

‘A stronger yuan holds dangers for poorer people’

However, a stronger yuan also holds dangers for the majority of China’s population, who have benefited less from the country’s increasing wealth than the affluent middle classes. If Chinese goods became less competitive, prices would have to be lowered in renminbi terms and companies’ profits would fall. That would lead to lower pay for workers and reduced investment in infrastructure due to lower tax revenues, so the dozen new cities the government is planning to build wouldn’t happen – and China depends on urbanisation to lift people out of poverty.

To put this in perspective, the two economies that took the biggest kicking when the world stopped trading last year were Japan and Germany – two big exporters. China suffered less, but if there is appreciation of the renminbi, the outcome could be just as serious as it was for those nations, and catastrophic for the country’s poorest people.

Because the UK does not generally compete with Chinese products, we do not have the same interest as the US in a stronger yuan. That would make Chinese imports more expensive, and if there is limited competition in the market we might simply have to pay more – effectively increasing inflation – whereas any benefits gained from British products being cheaper in Chinese terms would be marginal.