The G20 summit in Canada at the weekend was able to welcome the Chinese leadership seeming to bow to international pressure for Beijing to let its currency, the yuan, rise in value against the dollar and be more flexible.
China’s President Hu Jintao was praised by other G20 leaders for that and US President Barack Obama said he believes over time the yuan will appreciate significantly.
Obama told reporters: “We didn’t expect a 20 percent revaluation in a week. That would be disruptive to the Chinese economy, that would be disruptive to the world economy.”
Obama has been pressing for a revaluation saying the weak yuan gives Chinese exporters an unfair competitive advantage.
One reason Beijing has kept the yuan pegged to the dollar is that letting it rise would hit the profits of its manufacturers and remove its cheap labour advantage, but Yi Xianrong, Finance and Banking Professor at China’s Academy of Social Sciences doubts that.
He said: “Some people wonder how we have been able to provide limitless low-cost labour for so many years, and say that this labour source will gradually start to deplete by 2015. But I really don’t agree. This is mainly because the rural population is so large.”
That large population needs jobs or there is the risk of social unrest, which is why the Chinese government has to balance placating the US over the yuan with keeping its manufacturers competitive.