Global Crisis Blog

How China Taxes Its Workers Without Taxing Them: New Insight on the Downsized Yuan

By Shlomo Maital


  Reuters global editor Christia Freeland has made a brilliant observation in her NYT column (Capitalism in China: Irony is gone), Friday April 29, p. 2.   China’s policy of consistently undervaluing its currency, the yuan (renminbi, or in Mandarin, ‘money of the people’) is simply a subtle way to tax the workers.  She bases her observation on a talk by George Soros, who said at a conference,

   “the undervalued currency was a form of transferring purchasing power (wealth) from the citizens to the government without imposing taxation”.

 How does this work? 

  Today one yuan is worth about 15 U.S. cents, or 6.49 yuan per dollar.  Its true, purchasing-power value, is about 30 cents, or 3.33 yuan per dollar. How do we know?  If you bought items on a shopping list in Beijing, for 1,000 yuan,  in America those same items would cost about $300.   So China has a permanent half-price sale (if you pay in dollars).  To maintain this exchange rate, the Chinese government has to buy billions in U.S. dollar assets, to support the dollar.  It already has accumulated some $2.5 trillion! 

   But why?  It is not solely to sustain China’s export-driven growth model.  As Soros explains, when the yuan is undervalued, Chinese imports cost twice what they should, so ordinary people pay double for imported goods.  Who gains?  The government.  Why?  Because the government accumulates huge amounts of wealth, in buying up cheap dollars, and some of this wealth supports the top government officials.   The undervalued yuan is a huge tax, hidden, on the workers of China, justified as a pro-export policy, but probably sustained by the fact that it further strengthens, enriches and entrenches the central government and its officials. 

    Chinese workers’ standard of living would rise dramatically if the yuan rose to 3.33 per dollar.  But the governments’ wealth accumulation, and hidden tax, would disappear.  So don’t hold your breath waiting for a rapid yuan appreciation. It won’t happen.  As Adam Smith, noted, there are passions and there are interests. The interest of China’s officials and leaders is to sustain their hidden tax.  Until that interest changes, China’s yuan will remain overvalued. 

  Renminbi “money of the people”,  it turns out, is anything but.  Like many things in China, the word renminbi is a bitter irony.