Stronger Chinese yuan may hurt US consumers

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 US companies compete globally and protects local jobs.
Backers of a stronger Chinese currency against the dollar argue it will improve the US balance of trade with China and help US manufacturers compete globally and locally.
But it will also hurt US 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 US 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 US, including a better balance of trade, a stronger economy and more jobs. Though the US 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 US 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."
But with US unemployment at 4.5 percent, those US 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 US 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 US manufacturers to raise prices." The other short-term benefit to US consumers is that China recycles many of the dollars it receives for selling goods to the US by buying US government debt.
By keeping demand for US debt constant, interest rates, which move inversely to price, are kept low, further benefiting the US 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 US Treasuries, the second largest holder after Japan.
Failure by China to keep buying US 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 US consumers.
The Chinese yuan closed at 7.6135 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. US 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 US-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 US consumers, at least for now.