Meanwhile, China’s economy is moving like a runaway train. The World Bank raised its mainland growth forecast for this year to 9.5 per cent from 9 per cent but has warned Beijing to cool inflation and possible real estate bubbles. This is a headache for Chinese leaders because higher growth means higher inflation, and thus greater social unrest.
A bipartisan bill introduced in the US Senate merges previous legislative efforts to press mainland to change policies that critics say keep its yuan currency cheap, effectively subsidising exports and taxing competing imports.
“When there's a 20 per cent or 30 per cent undervaluation that reduces the price of a product coming in, that's not fair. That's cheating,” Democratic Senator Debbie Stabenow, a co-sponsor of the legislation, said. “If they're not going to do it, we're going to force them,” Republican Senator Sam Brownback added.
Beijing and Washington have been at loggerheads over the yuan for at least five years, ever since China began massively buying US debt. Recently, it said it might revalue its currency by about 10 per cent.
By some estimates, China holds reserves worth US$ 3 trillion. Should the yuan gain 10 per cent, China would suffer a nominal loss of US$ 300 billion. Should it go up by 40 per cent as some US economist suggest, the loss could reach US$ 1.2 trillion.
However, a higher yuan would penalise Chinese exports, which would negatively affect employment in the export-oriented sector. Chinese government figures indicate a 1 per cent re-valuation of the yuan would translate in an equal drop in exports, hence fewer jobs. In light of these facts, Chinese authorities said they have done all they can.
In addition to its currency problems, Beijing must also cope with other domestic economic problems. On the one hand, the World Bank forecasts inflation to rise by 3.7 per cent this year. On the other, China’ successful recovery from last year’s economic crisis was achieved through massive injection of public capital into the economy. Now, after the government provided more than 7.5 trillion yuan, it expects loans to be repaid and this could negatively affect China’s already fragile economy.