Why Americans should learn to love the renminbi

美国人应学会喜欢人民币

Until recently, few workers in America, Europe or Japan spent much time worrying about why they earned 10, 20 or even 30 times what a Chinese worker did. What was it that allowed, say, someone stacking boxes in a US factory to earn multiples of the wage earned by a Vietnamese or Mexican worker?

Some may have fondly imagined that they worked harder or, put another way, that Mexican or Chinese workers were lazy or incompetent. Others, much closer to the mark, may have put their higher wages and productivity down to their country’s institutional advantages: its legal and education system, and its infrastructure and technology. Some, perhaps subconsciously, may simply have considered their superior living standards a god-given right.

Not any more. As hundreds of millions of workers in the emerging economies, especially within Asia, have entered the global workforce, they have begun the slow process of levelling the playing field. Developing countries are improving their standards of education, infrastructure and technology, even if their legal and political institutions still lag. Incomes are narrowing. In 1990, at purchasing power parity, gross domestic product per capita in China was $800 against $23,000 in the US, a differential of 29. By last year that had shrunk to 6.2, according to figures from Royal Bank of Scotland. By 2015 it is expected to narrow to 4.3.

This convergence should not surprise us. Poorer countries are correcting the huge divergence in incomes that occurred at the start of the industrial revolution when western economies made unprecedented strides in productivity. That was an aberration, albeit one that lasted nearly 200 years. For a neutral observer who wishes the greatest well-being for the greatest number of people, the reversal of that trend is good news. After all, hundreds of millions of people have crawled from under the rock of poverty.

Back on planet earth, the view looks very different. This week the US Senate passed a bill that seeks to punish China for holding down its currency. In Tuesday’s Republican debate, Mitt Romney, frontrunner as the party’s nominee, accused former US leaders of having “been played like a fiddle by the Chinese”.

That rhetoric echoes real anger about the “disappearing” US middle class. Unemployment is stuck at 9.1 per cent. The US Census Bureau says median wages are lower in real terms than they were in 1999. The presumed natural order, in which American children would automatically be richer than their parents, has been overturned. The plight of the middle class is made all the more bitter by the concentration of wealth among the super-rich. The globalisation that has uncorked opportunity for millions in the developing world has also served the interests of a global elite.

There are things America and other advanced countries can do to raise productivity and to address inequality. But tinkering with China’s currency is not one of them. The arguments, pretty well rehearsed, include:

* Many items supposedly made in China are just assembled in China. A report by the Asian Development Bank Institute in 2010 found that, of the estimated $178.96 wholesale cost of an iPhone, the value of assembly work in China accounted for only $6.50. Most of the manufacturing cost comprises high-precision components made not in low-wage economies, but in high-wage ones such as Japan and South Korea.

* Since June 2005, when the renminbi was first unpegged, the Chinese currency has appreciated 30 per cent against the dollar. The real rate of appreciation is greater given higher Chinese inflation. We should not be surprised that this has failed to do the trick. The yen virtually doubled in value within two years of the 1985 Plaza Accord, with little impact on Japanese exports.

* Even if Chinese exports do become less competitive, jobs are unlikely to flock to high-wage economies such as the US. Rather they will tend to go to other low-wage ones such as Bangladesh, Vietnam, Indonesia and Mexico.

To confuse the issue further, a minority of the vitriol against China and other low-wage countries is spiced by racism. A not-untypical post on the FT’s website recently asked how American workers could be expected to compete against Chinese “coolies and slave labour”? Use of the first term speaks for itself. The second suggests a (probably insincere) concern for the lot of the exploited Chinese worker.

That view does not stack up. Migrant workers have left the countryside in their millions, not because they crave exploitation but rather because city life offers greater opportunity. According to RBS, the average manufacturing wage of Chinese workers has increased tenfold in the past two decades. The differential with western wages is narrowing. Whether it ever closes entirely is quite another matter. But demanding China revalue its currency a little faster won’t make a blind bit of difference either way.


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