The Obama administration and many Western policy makers celebrated the recent revaluation of China’s currency as a victory in persuading China to correct its trade imbalance with the rest of the world.
China’s move, however, was not motivated by international trade concerns. Beijing is using currency revaluation as a part of a larger strategy to change from being a producer of low-value-added exports to a leader in high-tech, green production. Coming in the aftermath of other policy changes, revaluation is meant to increase the cost of production, and discourage the old export-processing industries.
The decision to revalue the renminbi was announced after weeks of strikes in Toyota and Honda plants in China, and a call for independent unions by Honda employees. Beijing’s reluctance to repress the rising wave of strikes is a turning point in a country known for having little tolerance of labor militancy.
Though seemingly unrelated, the new exchange-rate policy, and the Communist Party’s tolerance of the strike movement, point to a new economic strategy. China is edging into the second stage of its globalization.
China’s globalization began with the rise of low-wage export-processing capitalism. Thirty years later, what made China an economic powerhouse is now a stigma the government is trying hard to dispel. Hoping to change the country’s role as the producer of cheap and low-end products for others, the Chinese government is trying to upgrade the economy by pouring resources into high-tech R&D and production. Meanwhile, it is redirecting the older export-processing industries toward producing for the domestic market.
Beijing is supporting a new generation of visionary entrepreneurs. High-tech economic centers now supplement the old free economic zones. State-of-the-art research centers are emerging even in Shenzhen, the epicenter of China’s low-wage capitalism. The government has been providing generous subsidies to high value-added industries. Meanwhile, it has eliminated export tax refunds for labor-intensive exporters and industries relying on low wages.
Across China’s coastal areas, local governments have been increasing the minimum wage in recent years. Moreover, the Chinese government has been actively supporting pro-labor legislation and workers’ demands for better wages and rights. The 2007 labor law requires all employers to provide their laborers with a signed contract, regardless of the size of their workforce. Changes in government attitude toward workers’ rights, and the gradual increase in wages, are among the signs that China is ready to leave behind its legacy of low-wage capitalism.
The new direction has already forced many low-value-added exporters out of business. A study conducted before the global economic crisis predicted the bankruptcy of more than one-third of China’s exporters by 2009. The crisis and the decline in exports only aggravated the situation. Hoping to restore economic growth, Beijing temporarily resumed tax refunds for the old export-processing industries. However, the decision to revalue the renminbi, and the government’s tacit support for workers’ demands in recent weeks, indicate a resumption of China’s pre-crisis policies.
Most low-end Chinese exporters are subcontractors for American and other foreign companies. Like companies trading within the United States, the Chinese subcontractors are also paid in dollars. The revaluation of the renminbi will cripple thousands of already troubled subcontractors by reducing their income after conversion to the local currency. Independent exporters, on the other hand, will lose price competitiveness and market share because of revaluation. Labor-intensive producers without the technological capacity to improve productivity or the ability to weather the rising costs will be forced out of business.
In all of this, China is saying farewell to its past economic strategy. It is beginning a new path to development.
Higher wages and better-protected labor rights will pave the way for a more democratic China. Meanwhile, China’s trade surplus with the world will persist. The new China will be exporting high-tech, green products.
Behzad Yaghmaian, a professor of political economy at Ramapo College of New Jersey. He is the author of Embracing the Infidel: Stories of Muslim Migrants on the Journey West. He is currently finishing a book on China.