Political unrest in China could result if the yuan continues to appreciate significantly against the U.S. dollar, according to Benjamin Wey, president of New York Global Group. Late Monday the yuan did just that, guided by the central bank, and the move will not be without consequences—although it remains to be seen what those consequences will be.
Wey (left), whose private equity investment firm has specialized in China-related transactions in the last decade, said in an interview with AdvisorOne that with two forces driving the yuan upward, the Chinese government is engaged in a balancing act that pits inflation against unemployment. The depreciation of the U.S. dollar across the globe is the first of those forces, and growth in China coupled with pressure from inflation is the second.
[See AdvisorOne coverage of FPA in China.]
“Any significant appreciation of the Chinese yuan,” said Wey, “will lead to massive unemployment, which will then threaten social and political stability in China. More than 50% of China's GDP is export oriented and export volume is directly tied to the value of the Chinese yuan. The Chinese government adjusts its currency or makes policy changes under these basic parameters.” He added, “The biggest influencer currently is the U.S. Fed’s large stimulus boost, and in the end, the U.S. can not directly change a country's sovereign rights to its own currency.”
So far this year, he points out, Chinese currency has appreciated 1.2% vs. the U.S. dollar. “Since the Fed’s policy loosened up last year, the yuan is up 5.4%. It’s a gradual upward trend, making Chinese money worth more than dollars here [in the U.S.].”
Faced with particularly severe inflation this year, China, Wey says, can do several things: it can raise the value of its currency, and it can work to reverse or reduce some of the current trade imbalance with other nations.
“There is $30 billion in foreign currency a month sent to China through trade,” he explains. The tremendous pressure caused by this influx of foreign currency to local producers, he says, must be converted. The situation, he adds, is economically driven, not politically driven.