Editor’s Note: There is increasing pressure from within the United States and other industrialized nations for China [PRC] to revalue its currency, the Yuan or Renimbi, which is estimated to be undervalued at 40% (1 dollar =8.3 Yuan). This has contributed to a major trade surplus in favor of China with the US, now surging at 160 billion dollars a year and rising. Beijing’s rampant military buildup has increased on a symmetrical level to the rising trade surplus. Of serious concern are China’s new generations of nuclear missiles, long-range fighter bombers and blue water Navy, including a rapidly expanding nuclear attack submarine fleet.
Inside of China, however, domestic instability is rising, due to an imbalance between the export-oriented coastal areas and poverty-stricken internal provinces. Although the Bush Administration has assured the US Congress that the Chinese currency will be revalued soon, many international economists question the accuracy of that promise. Within the internal debate among PRC leaders on whether to revalue its currency, the following realities must be considered:
Internal Poverty: Revaluation of the currency will impact the growing social instability of the vast, languishing, internal agricultural and rustbelt provinces of China. For example, annual disposable income ratio between Chinese farmers and urban residents dramatically widened from 1 to 2.5 in 1985 to 1 to 3.2 in 2004 (source: official PRC statistics). During the past three years, the Chinese Interior Ministry has reported more than ten thousand annual demonstrations and public protests by impoverished workers, farmers, migrant workers, and pensioners.
Unstable Banking System: China’s national banking system is debilitated with around 50% bad debts and loans due to nepotism and corruption. In the short term, a revaluation will further destabilize the banking system and create potential wide spread chaos. However, for the banking system to be fixed there must first be in-depth political reform. As part of true financial reform, the currency will inevitably have to be revalued to expand capacity and increase long-term investments needed for the economy to grow.
Regional Impact/ Military Spending: China’s dominance of the regional economy has been achieved by dominating international investment by producing cheap exports. This has prevented its neighbors’ from expanding their economies. For example, the government of Malaysia, one of the few stable economies in Southeast Asia, has been considering appreciation of its currency, the Ringgit. This would have to be conducted in tandem with action by China to revalue its currency to ensure that Malaysia’s export ability would not be victimized by China’s reluctance to revalue the Yuan. More competitive Asian neighbors would cut into China’s massive export profits and, as a result, could force Beijing to reduce its unprecedented military spending. This would improve the prospect for peace and conflict deterrence in the region.
