Year-End Reckoning: China's Yuan Rises, But So What?

Last Updated Jan 4, 2008 11:43 AM EST

Anyone who thinks about China, and that means everyone who wishes to survive in business, has been hearing the steady drumbeat coming out of Washington: Let's pressure the Chinese to raise the value of their currency. That will take care of all the economic imbalances, real or perceived, between the United States and China.

Okay, it now turns out that the yuan rose 7 percent against the dollar in 2007, twice the amount it appreciated the previous year. Economists are predicting it will increase again this year by roughly 7 percent.

But guess what? It's not going to make any real difference. In the short term, the value of goods made in China will actually increase because of the currency appreciation. The U.S. trade deficit will get worse, at least initially.

The real point, however, is that the currency issue is just one tiny piece of a much broader dialogue we in American business and policy circles ought to be having--a fifth of mankind is involved in one of the most dramatic economic transformations in history, one which I've been privileged to observe first hand since 1979. They're not even close to being finished. They have a huge supply of labor and even though it's getting more expensive, they will be able to undercut American labor costs for a long time to come.

We need to recognize that the burden of change is on us, not the Chinese. That happens to be the official line coming out of Beijing, but it's true. We need to make sure our economy keeps moving up the value added chain in terms of technology and innovation. And we need to get our economy into better balance, easing our consumption patterns and increasing our wealth, not our debt. We can count on the Chinese to keep doing exactly what they're doing for many more years, unless social or political instability interferes.

The other quick spin on China is this: most American policy-makers are assuming missionary-like purpose in preaching to the Chinese about how they have to change. But in real terms, America doesn't have much leverage over China. After all, they are one of the largest buyers of our government debt. Our retail chains and stores would fall off the earth if they couldn't import cheap Chinese products. The profitability of our biggest and best companies hinges in part on their success in the China market.

So I say, let the year-end evaluation of the yuan help set the stage for a genuine conversation about what should happen in Sino-American relations. What's your take?