January 15, 2005 06:38 AM
A Chinese Revaluation May Not Help U.S.
Excerpt: But many Chinese and foreign executives in China say that a revaluation of the yuan, whose exchange value is linked to the dollar, is unlikely to be a silver bullet for dealing with the American deficit. Costs here are so low, they say, that a revaluation is unlikely to narrow the deficit appreciably, and might even increase it.
Nearly the size of an old station wagon, a bright orange machine here mashes plastic pellets into rows of six-inch-long blue clips for hospitals across the United States. Pan Guotao, a 29-year-old worker from a village in northern China, sits on a plastic stool next to the machine and wields a straight razor to slice apart the clips, which are used to hold ice packs in plastic sleeves.
It looks like a simple operation, but it lies at the heart of the American trade deficit with China.
The Bush administration and many private economists have urged that the authorities in Beijing allow China's currency, the yuan, to rise in value against the dollar. They want the Chinese to stop buying up dollars in large amounts and issuing more and more yuan to hold down the value of the currency.
But many Chinese and foreign executives in China say that a revaluation of the yuan, whose exchange value is linked to the dollar, is unlikely to be a silver bullet for dealing with the American deficit. Costs here are so low, they say, that a revaluation is unlikely to narrow the deficit appreciably, and might even increase it.
China's edge in exports these days goes far beyond the low wages of Ms. Pan, who earns $1 an hour, with free room and board. Her employer, Charles M. Hubbs, who owns the plastics factory, calculates that the rent for his operation here, built by workers earning even less than Ms. Pan, is a quarter of what it would be in a city like Houston. Perhaps more important, China has learned to build factories and many kinds of equipment at a fraction of the cost in Western countries.
The big orange plastic injection molding machine costs $18,000 here, compared with as much as $60,000 for American models; the Chinese-made machine breaks down a little more often, but can be quickly fixed because the assembly plant is less than two miles away. The costliest part, a specially hardened and shaped mold used to form the clips, runs less than $8,000, against $70,000 in the United States.
Such savings leave Mr. Hubbs feeling insulated from even a big shift in the value of the yuan, which trades around 8.28 to the dollar. "With the currency where it is today," he said, "we can save 30 percent over our competition in the Caribbean easily."
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