Not Quite So Cheap.(World Affairs; Asia)

Byline: Mary Hennock; With Stephen Glain In Washington, D.C.

America begged China to strengthen the yuan. It has, but the results haven't made anyone happy.

With the dollar falling to record lows against the euro and the yen, no one is watching the yuan. Not even the American presidential candidates who had been blaming U.S. trade woes on Chinese currency manipulation. But look: after years of increasingly anguished Western calls for China to free its currency, Beijing finally has. The yuan strengthened against the dollar by 7 percent last year, and an additional 3 percent so far this year.

If the United States is starting to get the yuan it asked for, it is not seeing the results it expected. The American argument was that as the Chinese get richer, the yuan should get stronger, so they can buy more U.S. goods and help correct the huge U.S. trade deficit with China. The Bush administration spent plenty of time spotlighting China's "unfair" exchange rates at the IMF and G8 summits last year. Hank Paulson's appointment as Treasury secretary was trumpeted as a way to gain traction on the currency issue in particular, because as chairman of Goldman Sachs he developed strong relations with Chinese officials. But the rise of the yuan has not had an impact on the trade balance.

To those who've crunched the numbers, it's not a surprise. As American economists like Fred Bergsten have noted, Chinese labor is so cheap in comparison with American labor that it would take at least a 40 percent appreciation of the yuan against the dollar to make a dent in imbalances. What's more, Beijing's reasons for easing up on the yuan have nothing to do with ties to Paulson, much less concern about candidates like Senators Clinton and Obama, who threaten to punish "currency manipulators."

China has its own worries, particularly inflation. Last week, when Prime Minister Wen Jiabao delivered his annual report to China's Parliament, he stressed the twin perils of overheating growth and inflation. Wen told delegates it was vital to "keep structural price increases from turning into significant inflation." Consumer inflation hit 4.8 percent in 2007 (the government's target was 3 percent). In January, it surged to 7.1 percent, an 11-year high.

A stronger currency is seen as a key weapon against inflation. Aside from food inflation, "what concerns policymakers is inflation related to raw-material costs," says Qing Wang, Morgan Stanley's chief economist for Greater China. A stronger yuan would reduce the price of dollar-denominated oil, steel, copper and other minerals. Last month the central bank said it would ...