We in Vancouver can identify with our fellow citizens in Toronto as they put up with the inconveniences generated by security for the G20 meetings. Vancouver had its share of disruptions related to last winter’s Olympic Games; but, at least, we had one mother of a party during the Games to compensate. Will there be any reward for Toronto, Canada and, in particular western Canada from the G20 meetings?
Often these high level—to say nothing of high cost—meetings are not very productive and close with an amazingly content-free statement to the media. But, perhaps, the 2010 meetings will be different. Already, and even before the official meetings get underway, China has grabbed the headlines by announcing more flexibility for its currency, the yuan.
First, we should ask why China made this statement now. China has been under very considerable pressure from the United States to allow the yuan to move up against the US dollar. This would make Chinese goods more expensive and a little less competitive in the American market. It would also make US goods and services cheaper for China to buy. Both of these changes would help bring more balance to the one-sided trade that the US now has with China. By making its statement now, China hopes to deflect any criticism of its exchange rate policies. After all, it has already announced it will be adjusting them.
Then we should note exactly what China has said and not said. A conclusion that this means China will soon have a free floating currency would be reading far too much into China’s statement. Instead, China has said that it will allow the yuan to move within an unspecified range against an unspecified basket of currencies. Keeping the range narrow means that there would be little change from the present situation. Deciding what currencies should go into the basket and what weights they should have gives China far more control over the yuan than a free market would allow. In an extreme case, they may not choose to put the US dollar into the basket or they may weight it very low.
To look at what this means for Canada and the West, we would need to know if and to what extent the Canadian dollar will be in China’s currency basket. However, we can be fairly certain that any changes—even if they are little and late—will be in the direction of raising the yuan against the Canadian dollar. This will have a relatively small effect on our imports from China. Already many common goods are now made in lower cost countries like Vietnam.
It will make Canadian resources and Canadian companies that produce those resources cheaper for the Chinese to purchase. So we can expect continued strong sales of our resources into China and increased interest by China to purchase the companies that produce these resources. The former will help maintain a strong economy in Canada, especially the resource rich West. The latter will require vigilance to make sure that any organization operating in Canada follows our laws and maintains our standards. Any change is not likely to be massive, but it will be very interesting to see exactly what and how much China does and how all this plays out.
Dr. Roslyn Kunin is the Director of the Canada West Foundation’s British Columbia Office.
Posted by: Dr. Roslyn Kunin