What China can teach us.

It was the great currency revaluation that wasn't so great after all. On July 21, the Chinese government announced that it had revalued China's currency, the yuan, which had been artificially pegged at 8.28 per U.S. dollar since 1994. The cheap yuan has been giving companies in China as much as a 40% advantage, come export time, over their U.S. counterparts.

For years the currency issue had been largely below the media radar, with manufacturers and groups like IPC's Government Relations committee demanding that Congress and the Bush administration take action. Congress finally got serious about the matter in 2004, and three bills dealing with responses to China's currency manipulation were circulating in the Senate or House in 2005. When PCD&M joined PCB manufacturers at IPC's Capitol Hill Day this year, most senators and representatives were familiar with at least one of the bills.

There was an actual movement afoot in Washington. Democrats and Republicans were joining up for the common good. Congress (a synonym for intercourse, incidentally) seemed to be earning its pay. The threat of action by our lawmakers had forced China to blink, or so it seemed.

But after the news reports sank in, we realized China hadn't blinked. The value of the yuan rose only 2.2%, to 8.11 per dollar. China quickly issued follow-up statements: Not so fast. There were no plans to let the yuan float free. It will instead float against a basket of currencies that at this writing includes the U.S. dollar, the euro, the Japanese yen, the South Korean won, the UK pound, the Thai baht and the Russian ruble. No Taiwan dollars are allowed in this basket. The most the yuan will be allowed to fluctuate vs. the dollar in one day will be 0.3%.

In early August, the yuan had appreciated to a still-low 8.1062 per dollar.

What does the basket of currencies approach entail? For one, China's central bank will have to start buying euros, yen, won, baht, pounds and rubles in order to control the yuan, which means fewer dollars will be purchased. Will Korea, Taiwan and Japan follow China's lead and begin buying fewer dollars? The rest of Asia does tend to watch China. Malaysia unpegged its currency, the ringgit, from the dollar and went to a currency basket system immediately after China's announcement.

What would happen if the yuan reached 5 yuan per U.S. dollar, as some analysts have predicted could happen within this decade? The cost of parts and labor used to build PCBs in China would go up, increasing the final cost of the boards. This would affect all of the PCB manufacturers in China--both the Chinese-owned and foreign-owned facilities. Plenty of companies throughout Asia, Europe and North America are expanding their presence in China--Unimicron, AT&S and Viasystems come to mind.

Locating in China is currently a good business move. Dr. Hayao Nakahara's NTI 100 ranking of the world's top PCB makers by 2004 revenue includes Unimicron, AT&S, Viasystems and an assortment of other foreign manufacturers with plants in China. And as Nakahara points out in this issue, of the 11 PCB makers in China/Hong Kong on the NTI 100, only two of these are what he terms "Chinese" makers.

Despite its attempts to spin the news, what China fears most is that a strong yuan could lead U.S. retailers to abandon China and move to another country with lower operating costs. It could happen.

In the end, China can teach us a thing or two. China's government does what it thinks is best for its industry, and it deals with the repercussions later. That's not a bad idea, on its face. Government officials in the U.S. seem to spend much of their time trying to find ways to stifle industry with regulations.

And China, like any country, will react to international pressure, albeit slowly. Slow may be the watchword for China; it didn't become the world's oldest continuing civilization by changing overnight.