Stronger Chinese yuan may hurt US consumers

Stronger Chinese yuan may hurt US consumers
Sat 7 Jul 2007, 7:47 GMT

[-] Text [+] NEW YORK (Reuters) - Pushing China into allowing a faster
appreciation of the yuan has consequences for Americans looking for cheaper
products and low interest rates even as it helps U.S. companies compete globally
and protects local jobs.

Backers of a stronger Chinese currency against the dollar argue it will improve
the U.S. balance of trade with China and help U.S. manufacturers compete
globally and locally.

But it will also hurt U.S. consumers who have grown accustomed to an abundance
of inexpensive shoes, clothing and other goods made in the People's Republic of
China and potentially stoke higher prices across the board in the U.S. even as
households face higher interest rates.

"Rising costs are painful to everyone, and supporting local business is
important. However I think that ultimately, whoever can produce goods most
efficiently, with proper safety requirements and decent quality, should have a
fair representation in the marketplace," said Mike Joseloff of Brooklyn, who
with his wife was shopping ahead of the birth of their first child.

The long-term arguments for pushing China into accelerating the pace of yuan
reform are numerous for the U.S., including a better balance of trade, a
stronger economy and more jobs.

Though the U.S. economy historically runs a trade deficit, analysts say the
imbalance with China, a record $233 billion in 2006, has gone too far and can't
persist indefinitely.

"Many in the U.S. associate the trade deficit with a loss, or potential loss, of
jobs in the US," said Joseph Quinlan, chief market strategist at Bank of
America's Global Wealth & Investment Management in New York. "The more other
nations produce, the more we buy from overseas, the less work, less wages in the
United States."

CHEAP STUFF

But with U.S. unemployment at 4.5 percent, those U.S. workers with jobs, who far
outnumber those without, stand to benefit from low prices on consumer goods.

"The relatively inexpensive goods from overseas, with China being one supplier,
keep prices in the U.S. relatively low," said Joe Trevisani, chief market
analyst at FX Solutions. "As the yuan appreciates, it's harder for a poorer
person to afford Chinese goods and easier for U.S. manufacturers to raise
prices."

The other short-term benefit to U.S. consumers is that China recycles many of
the dollars it receives for selling goods to the U.S. by buying U.S. government
debt.

By keeping demand for U.S. debt constant, interest rates which move inversely to
price, are kept low, further benefiting the U.S. consumer.

Though the exact breakdown is not known, China has the world's largest foreign
exchange reserves at more than $1 trillion with $414 billion invested in U.S.
Treasuries, the second largest holder after Japan.

Failure by China to keep buying U.S. government debt would lower Treasury prices
and increase interest rates. That would ripple through the financial system,
affecting consumer credit from credit cards to mortgages, further eroding the
spending power of U.S. consumers.

The Chinese yuan closed at 7.6010 to the dollar on Friday, up about 7 percent
since it was revalued by 2.1 percent two years ago and freed from a dollar peg
to float in managed bands.

U.S. Treasury Secretary Henry Paulson reiterated on Monday he would like to see
China move faster on allowing the yuan to appreciate, while acknowledging that
adjustments in the yuan alone would not resolve the U.S-China trade imbalance.

The People's Bank of China said on Tuesday it will not change its long-standing
policy of gradual yuan appreciation.

And that -- despite a backlash against Chinese goods following news of faulty
Chinese-made tires and tainted pet food, seafood and toothpaste -- could be good
news for U.S. consumers, at least for now.

.

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