China is feeling the worldwide pressure to raise the value of its currency. After refusing to consider revaluation last fall, Chinese officials are now volunteering that they are studying the problem.

A revaluation would rein in the overheated Chinese economy by trimming exports and reducing available investment capital. U.S. companies sourcing in China would lose some of the current cost advantage. Rumors are circulating in world financial markets about how soon and how much China will revalue.

Pressure is heaviest from the United States, concerned about the transfer of manufacturing to China. But there is also pressure from Europe, where a 45 percent appreciation of the euro again the Chinese yuan is blamed for declining exports that have caused weak economic growth, barely above recession level. Neighboring Asian countries have also complained that they have lost export sales because China has kept its currency at a fixed rate to the U.S. dollar too long.

China has recently eliminated a small subsidy to exporters-initiated during the 1997 Asian financial crisis when other Asian countries devaluated against the Chinese yuan-aining an export price advantage against China. The Bank of China has announced it will try to reduce bank-lending growth to 16 percent this year from more than 20 percent last year.

China’s plan was to ignore demands from its trade partners for revaluation and use growing export earnings to finance new export industry jobs for its vast army of unemployed and underemployed workers. Recent actions may be an acknowledgement that his plan is not working. Chinese officials have been unable to keep export receipts from being diverted to luxury consumer exports, speculation in real estate and unneeded factory capacity that will not yield more jobs.

There may be a new plan to vent some pressure with a small revaluation, perhaps about 5 percent, and use the international currency market to reduce the conspicuous consumption and speculation that are draining the capital intended for job creating investments. Maybe the Chinese are better capitalists than we thought they were.

Revaluation is now a high probability for the next few months. Currency hedging might be wise. Marking up expected supply costs for second half of the year and identifying the next cheapest source after China should also be considered.

Any macroeconomic impact on the United States would not be felt until late in the year. It is not clear whether it would be negative or positive but it would not be large.

By: DocMemory
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