RAY SUAREZ: Finally tonight, the impact of a change in China's currency policy -- economically and politically. China's government announced today it will begin de-coupling its currency, the yuan, from its link to the dollar. For more than a decade, it's been pegged to the dollar at a rate of 8.28 yuan for every dollar.
But today, China said it will start raising the value of the yuan against the dollar, albeit by just 2 percent initially. Instead of being linked solely to the dollar, the yuan will now float narrowly against a basket of foreign currencies. The move comes after months of pressure from U.S. Treasury Secretary John Snow and other trading partners who complained that China's currency policy allowed its businesses to undercut competitors worldwide. The U.S. has a large trade deficit with China and there's been talk on Capitol Hill of possible trade sanctions.
RAY SUAREZ: For some analysis of China's move, I'm joined by Nariman Behravesh, chief economist at Global Insight, an economic forecasting firm. And Peter Morici, a professor business at the University of Maryland; he's a former chief economist at the International Trade Commission.
Nariman Behravesh, this revaluation is something that American policymakers have been asking China for years. Have they finally gotten what they wanted?
NARIMAN BEHRAVESH: Well, they've gotten a little bit. This is sort of one step in the right direction. A lot depends on what China does next. You know, will they keep raising the value of the yuan or will they sort of live for a while with this 2 percent increase, as you were saying.
If it's just 2 percent, it's nothing, basically no impact and I don't think it will satisfy the U.S. Congress. On the other hand, if this is the first step in a series of steps, then I think that will satisfy the Congress and will make a difference.
RAY SUAREZ: Professor Morici, a step in the right direction?
PETER MORICI: Well, it's a very small step. By some estimates, the yuan is undervalued by as much as 40 percent, so a two percent change, while the Chinese exporters can make up that difference absorb that price change just by improving their productivity a bit.
RAY SUAREZ: Why do they do that, then? I mean, 40 percent is a pretty sizable dislocation from a real value.
PETER MORICI: Well, China's whole development strategy is based on growing its exports. And this provides a huge subsidy to its exporters. In order to maintain the situation, China has to purchase dollars in amounts equal to about a third of the value of their exports. This is like a 33 percent subsidy on their exports. It's an export-driven industrial policy.
RAY SUAREZ: But, Nariman Behravesh, isn't it also a heavy hit on their importers? Fast growing economies import capital goods, they import oil, they import Finnish products from the rest of the world, don't they?
NARIMAN BEHRAVESH: Well, again, it all depends on how much of a revaluation occurs. Two percent will do nothing in terms of raising their -- the price of imports. But, you know, from that perspective it's tiny still. But any change, any further change in the value of the yuan will reduce the competitiveness of Chinese exports and also increase the competitiveness of our exports. That's the whole point. But, again, as we were saying, as both of us are saying, this is not big enough, anywhere close to being big enough to make a difference.
RAY SUAREZ: Professor Morici, after the peg was removed today, the dollar plunged. Why?
PETER MORICI: Well, I think there was some anticipation that the dollar's value would fall with the yuan, and I think it was somewhat of a psychological consequence of what happened. I think that a week from now this will have had no real effect on the fundamental value of the dollar relative to the yen or the euro.
RAY SUAREZ: So you think this is ultimately a political move and not really an economically-based one?
PETER MORICI: This is much more of a political move than an economic move. The president has been very accommodative. Secretary Snow has been very accommodative to the Chinese. He's only pressed them to the extent that he has had congressional pressure to do something.
And he has persuaded Congress to back off the notion of a large tariff on the promise that he would deliver something over the next couple of months. Well, this gives him something to say he delivered. Unfortunately, substantively it's not a lot. Also it helps with the purchase of UNOCAL; it distracts us from our attention there.
RAY SUAREZ: Do you agree with that, Nariman Behravesh?
NARIMAN BEHRAVESH: Could I just --
RAY SUAREZ: Go ahead.
NARIMAN BEHRAVESH: I disagree in this sense. I think certainly the politics vis-à-vis the U.S. Congress were important, but China also did this for internal reasons. China's been the recipient of a lot of hot money coming in to finance all kinds of investments and raising the exchange rate like this, even in a small step, will cool off that in-flow of hot money. So it wasn't just political pressure from the U.S., but there were also internal considerations, important internal considerations as China looks to cool down its economy.
RAY SUAREZ: Does a more valuable yuan also allow China to eventually pay its own workers more, let the Chinese producers see a better payday from the things that they're selling to the rest of the world?
NARIMAN BEHRAVESH: Well, certainly a stronger or more valuable, as it were, yuan, will increase the purchasing power of the average Chinese worker. There's no doubt about that. So it will improve their living standards, again, assuming it rises some more.
RAY SUAREZ: And if it doesn't? If it keeps trading now in this narrow managed band, a few cents one way or the other, is this something that the average Chinese worker is even going to notice?
NARIMAN BEHRAVESH: No. This will have, as I said, almost no impact, if it stays at this. But I doubt very much it will stay at the 2 percent. I think the Chinese will come under pressure both politically and also it could increase the flow of -- at least for a while the flow of hot money, speculative money into China in anticipation of further rises. So I don't think this is the end frankly.
RAY SUAREZ: What about you? Do you think that this will have to be followed by further changes down the road?
PETER MORICI: Well, right now the policy poses considerable burdens on the Chinese. They have to spend about 12 to 13 percent of their GDP, and that number is growing, each year in the purchase of dollars. That's lost purchasing power to their population. And the fundamental value of the yuan rises about 5 percentage points a year because of their superior productivity growth.
They're a rapidly developing economy and they're catching up. So they have to revalue by 5 percent a year -- five percentage points a year just to stay even -- and we've only seen 2 percent today. Unless they do something more fundamental, the pressures on their economy are not going to go away, nor are the pressures on our economy going to go away.
RAY SUAREZ: So wait -- let me understand this. They are as a matter of policy keeping their people poorer in the short term to stay with this policy?
PETER MORICI: That's how you get those everyday low prices at Wal-Mart. Those cheap coffee tables come on the backs of the workers on the export platforms, as well as the people that own the companies. Their profits are very thin.
RAY SUAREZ: Well, other Asian economies are tightly tied to China's, Nariman Behravesh. Are we going to see a sort of ripple effect throughout Southeast Asia?
NARIMAN BEHRAVESH: Indeed we will. And this morning you saw Malaysia de-peg from the dollar. You saw the yen, the Japanese yen, appreciate in value; the Indian rupee appreciate in value. There is a sort of sympathetic move of other currencies across Asia with the yuan. So as the yuan rises, we would expect to see other currencies rise.
Our best bet is that over the next couple years the Chinese will allow their currency to rise about 10 percent, maybe that 5 percent a year that we're talking about earlier, and that the other Asian currencies will also rise with it.
RAY SUAREZ: Well, you heard Professor Morici mention those coffee tables at Wal-Mart. Does this also mean that there's going to be inflationary pressure as a result in the United States?
NARIMAN BEHRAVESH: Well, indeed there could. But, again, it's not going to be huge. The predominance of the pressure is on inflation worldwide. It's still pretty much downward. This will raise inflation a little bit in the U.S., but more in the nature of, say, a few tenths on the CPI, for example. So we don't see a big impact on inflation, but there will be some impact.
RAY SUAREZ: But what if those revaluations, as you suggest, continue? Will, eventually we start to see a different price profile for Chinese goods?
NARIMAN BEHRAVESH: Well, if it's only 10 percent in the next couple of years, if you believe that forecast, then that would probably add a couple tenths to the CPI; if it's a lot more than that, then it certainly could add increasing amount to the CPI.
RAY SUAREZ: Nariman Behravesh, Professor Morici, good to see you both.
PETER MORICI: Thank you.
NARIMAN BEHRAVESH: Thank you.