China will not yield to yuan pressure
By Zhang Fengming |
March 26, 2010, Friday
|
Print Edition
Print Edition
NOBEL laureate Paul Krugman and Morgan Stanley Asia Chairman Stephen Roach have added their voices to the debate about the value of the Chinese currency, ratcheting up the blame game over who bears responsibility for global trade imbalances.
The Roach vs Krugman confrontation comes amid growing tension between the United States and Chinese governments about the yuan, with Washington urging it be allowed to appreciate and Beijing insisting that the value of the currency is nobody's business but its own.
Many economists say it's unlikely that China will acquiesce any time soon because the fundamentals of its economy - sagging exports, inflationary expectations and the persistence of "hot money" - mitigate against appreciation.
Earlier this month, Krugman said China's tight rein on the yuan was hindering a global economic recovery. He said growth would be about 1.5 percentage points higher if the yuan wasn't kept undervalued.
Several days later, Roach called Krugman's remarks "very bad" advice, and suggested that increased Chinese spending and more US saving would be better ways of spurring growth and redressing trade imbalances. "We should take out the baseball bat on Paul Krugman. That the advice is completely wrong," Roach said in a Bloomberg interview.
There have been repeated calls from the US and other major economies for China to let the yuan appreciate, which in turn would make Chinese exports more expensive and theoretically reduce its trade surpluses with the US, European Union and other countries.
Stiff penalties
Premier Wen Jiabao said on March 14 that the yuan is not undervalued and that China will not succumb to outside pressure to change its foreign-exchange policy regime.
Two days later, five US senators proposed imposing stiff penalties against China if it refused to revalue its currency. That followed a demand by 130 House members that the Obama administration take action to force China to raise the value of the yuan.
The US has already announced a slew of penalties against imports from China. In the past three months, it decided to levy tariffs on Chinese-made potassium phosphate salts, coated paper, steel tubes, gift-wrapping ribbons, electric blankets and wire decking.
Those actions prompted stern rebukes from Chinese officials.
Commerce Minister Chen Deming accused Washington of politicizing the currency issue ahead of an April 15 deadline for the US Treasury to rule whether China is "unfairly" holding down its exchange rate to gain a competitive edge.
Economists said looking long-term, the yuan will appreciate, but the current spat may delay that process.
"The Chinese yuan's appreciation is still forecast, but only after political tensions ease," said Ben Simpfendorfer, a Royal Bank of Scotland economist.
Finger-pointing only exacerbates the situation and stiffens the resolve of China not to bow to what it considers to be outside interference in its own affairs.
"The current tensions might not have a big impact on the timeline of the yuan revaluation," said Tommy Xie, an OCBC Bank economist. "China will continue to follow its own schedule." Xie said that the domestic inflationary pressure and a solid recovery in exports will be the triggers for any revaluation.
Banks in China doled out a record 9.6 trillion yuan (US$1.3 trillion) of new loans in 2009, helping fan 8.7 percent economic growth but also fueling inflationary expectations.
Trade surpluses
China's Consumer Price Index, a main gauge of inflation, jumped a faster-than-expected 2.7 percent in February from a year earlier. The National Development and Reform Commission predicted this month that March inflation will wane, leaving first-quarter inflation at between 2 percent and 2.5 percent.
The forecast seemed to indicate that inflation isn't an immediate concern in the top echelons of government. China is forecasting 2010 inflation at no more than 3 percent.
Meanwhile, China's trade surpluses are narrowing. The surplus in February contracted to US$7.6 billion from US$14.1 billion in January and US$18.4 billion in December on a recovery in imports.
Wen said that China will report a trade deficit of about US$8 billion in March, its first trade deficit since May 2004.
"A trade deficit in March, if realized, would be positive and likely would help reduce international/political pressure on China in relation to currency and trade," said Peng Wensheng, a Barclays Capital economist.
There appears to be a growing consensus among economists that the yuan will appreciate between 3 percent and 5 percent this year.
Chinese policy makers began relaxing their grip on the yuan in July 2005, allowing a gradual appreciation. That ended with the global financial crisis in 2008 but is expected to resume at some point.
China has already conducted stress tests in textiles and other labor-intensive exports sectors to gauge the impact of a higher yuan on trade.
Vice Commerce Minister Zhong Shan said that any further appreciation of the yuan risks driving exporters out of business.
Concern about so-called "hot money," or speculative betting on the yuan, is another deterrent to appreciation, economists said.
Wen said China will further improve its exchange rate mechanism and keep the yuan at a reasonable and balanced level.
"Market speculation over an immediate yuan appreciation or even a one-off revaluation is overdone," said Jinny Yan, a Standard Chartered Bank economist.
The Roach vs Krugman confrontation comes amid growing tension between the United States and Chinese governments about the yuan, with Washington urging it be allowed to appreciate and Beijing insisting that the value of the currency is nobody's business but its own.
Many economists say it's unlikely that China will acquiesce any time soon because the fundamentals of its economy - sagging exports, inflationary expectations and the persistence of "hot money" - mitigate against appreciation.
Earlier this month, Krugman said China's tight rein on the yuan was hindering a global economic recovery. He said growth would be about 1.5 percentage points higher if the yuan wasn't kept undervalued.
Several days later, Roach called Krugman's remarks "very bad" advice, and suggested that increased Chinese spending and more US saving would be better ways of spurring growth and redressing trade imbalances. "We should take out the baseball bat on Paul Krugman. That the advice is completely wrong," Roach said in a Bloomberg interview.
There have been repeated calls from the US and other major economies for China to let the yuan appreciate, which in turn would make Chinese exports more expensive and theoretically reduce its trade surpluses with the US, European Union and other countries.
Stiff penalties
Premier Wen Jiabao said on March 14 that the yuan is not undervalued and that China will not succumb to outside pressure to change its foreign-exchange policy regime.
Two days later, five US senators proposed imposing stiff penalties against China if it refused to revalue its currency. That followed a demand by 130 House members that the Obama administration take action to force China to raise the value of the yuan.
The US has already announced a slew of penalties against imports from China. In the past three months, it decided to levy tariffs on Chinese-made potassium phosphate salts, coated paper, steel tubes, gift-wrapping ribbons, electric blankets and wire decking.
Those actions prompted stern rebukes from Chinese officials.
Commerce Minister Chen Deming accused Washington of politicizing the currency issue ahead of an April 15 deadline for the US Treasury to rule whether China is "unfairly" holding down its exchange rate to gain a competitive edge.
Economists said looking long-term, the yuan will appreciate, but the current spat may delay that process.
"The Chinese yuan's appreciation is still forecast, but only after political tensions ease," said Ben Simpfendorfer, a Royal Bank of Scotland economist.
Finger-pointing only exacerbates the situation and stiffens the resolve of China not to bow to what it considers to be outside interference in its own affairs.
"The current tensions might not have a big impact on the timeline of the yuan revaluation," said Tommy Xie, an OCBC Bank economist. "China will continue to follow its own schedule." Xie said that the domestic inflationary pressure and a solid recovery in exports will be the triggers for any revaluation.
Banks in China doled out a record 9.6 trillion yuan (US$1.3 trillion) of new loans in 2009, helping fan 8.7 percent economic growth but also fueling inflationary expectations.
Trade surpluses
China's Consumer Price Index, a main gauge of inflation, jumped a faster-than-expected 2.7 percent in February from a year earlier. The National Development and Reform Commission predicted this month that March inflation will wane, leaving first-quarter inflation at between 2 percent and 2.5 percent.
The forecast seemed to indicate that inflation isn't an immediate concern in the top echelons of government. China is forecasting 2010 inflation at no more than 3 percent.
Meanwhile, China's trade surpluses are narrowing. The surplus in February contracted to US$7.6 billion from US$14.1 billion in January and US$18.4 billion in December on a recovery in imports.
Wen said that China will report a trade deficit of about US$8 billion in March, its first trade deficit since May 2004.
"A trade deficit in March, if realized, would be positive and likely would help reduce international/political pressure on China in relation to currency and trade," said Peng Wensheng, a Barclays Capital economist.
There appears to be a growing consensus among economists that the yuan will appreciate between 3 percent and 5 percent this year.
Chinese policy makers began relaxing their grip on the yuan in July 2005, allowing a gradual appreciation. That ended with the global financial crisis in 2008 but is expected to resume at some point.
China has already conducted stress tests in textiles and other labor-intensive exports sectors to gauge the impact of a higher yuan on trade.
Vice Commerce Minister Zhong Shan said that any further appreciation of the yuan risks driving exporters out of business.
Concern about so-called "hot money," or speculative betting on the yuan, is another deterrent to appreciation, economists said.
Wen said China will further improve its exchange rate mechanism and keep the yuan at a reasonable and balanced level.
"Market speculation over an immediate yuan appreciation or even a one-off revaluation is overdone," said Jinny Yan, a Standard Chartered Bank economist.
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