The Last Chapter of the Familiar China Story?

This piece by Bloomberg today could really have been written any time in the past five years. But I'm starting to wonder if China's economic growth is not reaching the point where China's monetary policy is going to have to adjust considerably. If China's central bank does indeed take significant steps to cool the economy, then it may be the case that we're soon going to stop reading stories like this one.

Paulson May Be Unable to Get China, U.S. Off Collision Course

April 23 (Bloomberg) -- When China allowed a small rise in the value of its currency in 2005, Hangzhou food-company executive Wang Yuzhou saw his profits squeezed. Any further move threatens the livelihoods of his 1,000 workers and the 5,000 rural households that supply his plants, he says.

John Walker says China's currency policies have already cost 100 jobs at his Lewisburg, Tennessee, die-casting company. He wants the U.S. Congress to do ``whatever it takes'' to force an increase in an undervalued yuan that he contends gives an unfair advantage to Chinese competitors.

Wang's and Walker's interests collide next month when U.S. Treasury Secretary Henry Paulson and Vice Premier Wu Yi hold their next set of talks under a semiannual schedule set up last year. Without steps to allow a significant increase in the yuan, which most economists consider unlikely, Paulson may not be able to continue holding off moves in Congress to punish China.

"After years of talk and bluster, protectionism no longer seems like an empty threat," says Stephen Roach, chief global economist at Morgan Stanley in New York. "Trade sanctions against China are now all but inevitable."

Exports, which accounted for about 40 percent of China's economy last year, bring growth, jobs and stability that compel the nation's leaders to avoid any dramatic rise in the yuan, says Don Straszheim, vice chairman of Newport Beach, California- based Roth Capital Partners.

"The weak currency is central to China's whole growth strategy," says Straszheim, who specializes in China's economy. "They are going to take their chances and move as slowly as they possibly can." China's textile industry says it loses 8.2 billion yuan ($1.1 billion) of annual profit for each percentage point rise in the currency.

..."Margins tend to be very slim in China," says Christopher McNally, a China specialist at the East-West Center in Honolulu. "A revaluation of 20 to 30 percent would be devastating for a lot of export manufacturers."

Chinese officials say they are eager to rein in their trade surplus, but not at the cost of jobs or social harmony. Hu Xiaolian, vice governor of China's central bank, told a meeting of the International Monetary Fund in Washington April 14 that "external stability can only contribute to overall sustained stability when anchored by domestic stability."

I've long thought that China's exchange rate will only be changed significantly when it is in China's interests to do so. The easiest way to imagine a yuan appreciation being in China's interests is a) if it would help cool down an overly-hot economy, and b) if the domestic economy (or perhaps better put, its social structure) is strong enough to handle the inevitable income and job losses that will follow in some of China's export industries. Condition (a) is clearly met at this point, I think. What we need now is some confidence that condition (b) is not out of reach, either.