By AARON BACK
For years, the U.S. has been the most vocal advocate of yuan appreciation, as part of its efforts to address its persistent trade deficit with China. But in the end a stronger yuan may do the U.S. little good. The biggest beneficiaries may turn out to be other emerging economies vying to compete with China as low-cost production centers.
The yuan's recent gains against the dollar, along with rising wages and general inflation in China, are starting to push some basic export industries out of that country, economists say. Those businesses are moving to countries where expenses are even lower and foreign-exchange rates don't threaten to crimp exports.
So, yes, the yuan's appreciation may help shrink the Chinese trade surplus with the U.S. by making goods from China more expensive in dollars and therefore less attractive to U.S. customers. But its overall impact on U.S. trade may not be that great, as imports from other emerging markets replace those no longer coming from China.
"The simple idea that the [yuan] is going to make a swing to the U.S. trade balance just doesn't add up," says David Carbon, head of economics and currency research at Singapore-based DBS Bank Ltd.
The bigger story, Mr. Carbon says, is the migration of low-end export manufacturing, a process that has been going on since World War II "and will continue on for a long time." It started with Japan, then moved to Singapore and Hong Kong, South Korea and Taiwan, and eventually China. "The guys who are left below China and could be coming up are India and Vietnam," Mr. Carbon says.
Vietnam stands out as one of the clearest beneficiaries of yuan appreciation because of the weakness of its currency, the dong. Over the past year, the yuan has risen about 14% against the dong. "There are sunset industries in China now, and for those industries the sun is rising in countries like Vietnam," says Tim Condon, chief Asia economist for ING Groep NV. Light industries such as textile manufacturing are among those most likely to make such a move, he says.
There is some benefit to the U.S. in this trend. If production moves to cheaper markets, then higher prices for goods from China because of a stronger yuan aren't likely to be a major contributor to inflation in the U.S.
Japan Wins, Too
Japan also could benefit from continued yuan appreciation, in a different way from Vietnam. It thrives by producing high-technology, high-value-added exports like hybrid vehicles and specialist manufacturing equipment, fields where China isn't yet a direct rival. So the biggest benefit to Japan of a stronger yuan isn't a greater ability to compete with China in selling to the rest of the world. Rather, it is the growing opportunity to export to China.
The yuan hasn't been gaining on the Japanese yen, though. Indeed, while the Chinese currency has risen about 5% against the dollar since last June, it has fallen about 5% against the yen.
But Mr. Carbon says that could change. Intervention in the currency markets by the Group of Seven leading nations in the wake of the Japanese earthquake and tsunami in March shows a determination not to let the yen appreciate much beyond 80 per dollar, not far from its current level, to protect Japanese exporters as the country tries to recover, he says. Thus, if the yuan continues to gain on the dollar, it eventually will start to gradually rise against the yen as well, Mr. Carbon says.
That would make Japanese goods cheaper in China, perhaps allowing Japan to build on the $49.6 billion trade surplus it had with China last year, according to Chinese data. An increase in Japanese exports to China would help offset the damage that the yen's strength against the dollar has done to Japan's trade with the U.S.—and the impact of that damage on the Japanese economy. Mr. Condon blames currency factors for the weakness of Japan's recovery from the global financial-market crash and recession of 2008-09.
Mr. Back is the deputy bureau chief for Dow Jones Newswires in China. He can be reached email@example.com.