After several years of pushing, the plastics industry and other manufacturing sectors seemed to have gotten at least part of what they wanted when China announced July 21 that it would move its currency to a more market-based system. But analysts are divided on whether the move ultimately will have much impact on trade flow.
U.S. industry has lobbied strongly for such a move for several years, arguing that China's currency is as much as 40 percent cheaper than it would be if set by market rates, which has given Chinese imports an advantage and pushed U.S. trade deficits higher.
China's announcement, that it will revalue its currency by 2.1 percent, arguably won't have any real impact, but is a good first step, according to U.S. groups like the National Association of Manufacturers and the Manufacturers Alliance/MAPI.
Beijing announced it will take the yuan off its peg to the dollar, where it has sat for a decade, and tie it to a basket of yet-to-be identified currencies that will let it move as much as 0.3 percent a day - or 1.5 percent a week. Over the longer term, that could mean major changes.
The Chinese decision comes amid substantial browbeating by the U.S. government - though officials at the Chinese Embassy in Washington deny that China made the change because of pressure from the United States.
``China won't change its currency system for a bilateral trade partner,'' said Tian Jun, counselor of the embassy's Economic Affairs Office. ``Strengthened yuan won't really solve the trade disputes between the two countries.
``Even two-digit percentage changes will not have the impact expected by some people, not to mention the 2.1 percent move yesterday. The U.S. manufacturers will realize that they cannot get jobs back home by forcing China to revalue its currency,'' Jun stressed. ``Most likely, they'll see jobs going to other developing countries.''
China is dropping the dollar peg to ``balance its own economy,'' according to Jun. ``We are successfully slowing down the growth rate,'' he added. Although the latest statistics report a rate of 9.5 percent for China's economy in the first half of 2005, Jun said the core inflation has been reduced to 1.9 percent.
North American plastics industry officials welcomed the move.
``The immediate revaluation of 2.1 percent is less important than the prospect of further revaluations under the system that China announced this morning,'' said Bill Carteaux, president of the Society of the Plastics Industry Inc. in Washington.
J. Brian Noll, general manager of Tessy Plastics (Shanghai) Co. Ltd., said the change is ``at the low end of our estimate, so the effect will be less than planned.'' The firm is a unit of injection molder Tessy Plastics Corp. of Elbridge, N.Y.
Noll said the revaluation will have a small effect on costs for manufacturing facilities in China.
``The price of oil is having a much greater impact on costs, both on resin costs for all markets and on freight costs for export markets,'' he said.
Noll said American manufacturers with operations in China may want to reduce exports from those plants and boost sales to customers in China.
Winona, Minn.-based compounder RTP Co. also considers the revaluation good news, according to Dick Zhu, general manager of the company's new plant in China.
``Our assets in China are increasing the value as a result of the currency change,'' said Zhu. He added that the impact depends on a company's target markets. ``We won't be affected too much,'' he said. ``We will be selling a lot in the domestic [Chinese] market.'' RTP's new plant, in Suzhou, is slated to open in October.
Walter Kuskowski, president of toolmaker Wentworth Technologies Inc. in Hamilton, Ontario, said the revaluation is a step in the right direction.
``Any move is appreciated, but in some instances the gap is so huge that a move of 10 or 20 percent will not eliminate the problem,'' he said.
He said Chinese industry still primarily makes lower-tech tooling. But he said that if a Chinese company is making a mold to U.S. standards, using good-quality steel and the latest equipment, the cost difference is not as much, and winds up being about equal to work coming out of Wentworth's plant in Poland.
Jack Lemkin, president of mold-component importer Sinitron Inc. in Columbus, Ohio, predicts Beijing probably will let its currency rise only 5 or 6 percent, because China wants to maintain stability. He said Sinitron does a significant part of its business in China, and revised its contracts about a month ago in anticipation of a revaluation.
He predicted that the U.S. government will not want China to revalue too much, for fear that China will buy less U.S. government debt if the yuan no longer is directly tied to the dollar.
``We buy their goods and they buy our [treasury bills] and support our housing market,'' Lemkin said. ``No one is going to rock the boat.''
There's a spirited debate about the long-term impact.
Consultants like Peter Mooney, president of Plastics Custom Research Services in Advance, N.C., said studies have suggested that even a major revaluation would not have much impact.
Mooney said an analysis by the Asian Development Bank concluded that a 10 percent revaluation would mean only a $3.62 billion improvement in a U.S. trade deficit with China that stands at $170 billion. A 20 percent revaluation would lead to a $7.8 billion improvement, he said.
That's a point echoed by Federal Reserve Chairman Alan Greenspan in recent congressional testimony, when he said U.S. companies probably will turn to other low-wage nations.
But others do see an effect, if other Asian nations are pressured by China's move to adjust their currencies. Thomas Duesterberg, president of the Arlington, Va.-based Manufacturers Alliance, said the group does not have a specific estimate for China, but if the Chinese currency increases by 25-40 percent, that will trigger currency adjustments in other Asian countries.
MA believes it could have about a $100 billion effect on the overall U.S. trade deficit, which stands at almost $700 billion a year.
U.S. industry groups clearly are banking that the Chinese announcement is just an initial down payment.