March 15 (Bloomberg) — China’s Premier Wen Jiabao rebuffed calls for the yuan to appreciate, risking a further deterioration in relations with the U.S. where lawmakers and economists say his stance is hampering a global recovery.
“I don’t think the renminbi is undervalued,” Wen said yesterday at a press conference in Beijing marking the end of China’s annual parliamentary meetings, using another term for the yuan. “We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency.”
Non-deliverable yuan forwards fell the most in more than a month as Wen’s remarks prompted traders to reduce their expectations for appreciation in the coming year.
U.S. lawmakers, including Senator Charles Schumer, are proposing that China be hit with stiffer tariffs to compensate for the unfair export advantage they say comes from an undervalued currency. Economist Paul Krugman estimates that global growth would be about 1.5 percentage points higher if China stopped restraining the value of the yuan, and after Wen’s comments said the U.S. should consider putting a 25 percent surcharge on Chinese goods.
“Chinese officials are alone in their refusal to acknowledge that the yuan is undervalued,” Senator Charles Grassley of Iowa, the ranking Republican on the Senate Finance Committee, said in a statement responding to Wen’s remarks. “If they choose to stick their heads in the sand, we’ll have to find another way to address this problem because it’s been going on for far too long.”
Yuan Forwards Fall
Non-deliverable yuan forwards fell 0.2 percent to 6.6425 per dollar as of 11:45 a.m. in Hong Kong today, the biggest decline in more than a month. The contracts indicate that traders are betting the currency will gain about 2.8 percent in the next 12 months.
Wen also urged America to “take concrete steps to reassure investors” about the safety of dollar assets, repeating concerns that he expressed a year ago, sparked by a growing U.S. fiscal deficit.
The U.S. currency has climbed about 7 percent from last year’s Nov. 25 low, according to the Dollar Index, a six- currency gauge of the greenback’s value.
Treasury Department figures show China’s holdings of Treasury securities dropped for a second month in December to $894.8 billion. Only Japan holds more Treasuries.
Wen, 67, echoed central bank Governor Zhou Xiaochuan’s comments that China needs to be cautious in ending crisis policies, which have included pegging the yuan at about 6.83 per dollar since July 2008 as the global financial crisis took hold.
One-Off Revaluation
The premier reiterated that the nation will keep the yuan “basically stable” and maintain a moderately loose monetary policy and a proactive fiscal stance. He said it’s “essential” for the timing of any policy changes to be appropriate.
“This is a sign that there will be no one-off revaluation in coming months,” said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong. “China’s top policy makers do have their own currency reform plans but coercion from other countries will do disservice to this cause.”
A bipartisan group of U.S. senators including Schumer, a New York Democrat, wrote Commerce Secretary Gary Locke last month, saying imports from China are being subsidized by that nation’s intervention in the currency market. Grassley, in his statement, said the U.S. should consider bringing a case against China’s currency policy at the World Trade Organization.
‘Strong Supporter’
The Chinese premier said that pressure for currency gains can amount to trade “protectionism,” adding that “I’m a strong supporter of free trade.” Protectionism affecting China will backfire because much of the nation’s trade involves foreign-invested exporters, Wen said.
The yuan rose 21 percent against the dollar between July 2005 and July 2008, before the government halted its advance to protect exporters. The dollar and the yuan have strengthened against the euro this year, pushing up the cost of Chinese exports in the European Union, the Asian nation’s biggest market.
Krugman, a Nobel Prize-winning economist, wrote in a March 14 New York Times editorial that China’s currency policy “seriously damages the rest of the world” and said Wen “absurdly” called the yuan fairly valued. A 25 percent surcharge on Chinese imports would force China to take action to revalue the yuan, he said.
‘Take a Stand’
“I don’t propose this turn to policy hardball lightly,” Krugman wrote. “But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.”
Ballooning sovereign debt and high unemployment around the world could send the global economy into a second, or “double dip” downturn, Wen said. In China, inflation, combined with wide income gaps and official corruption, could lead to social instability “and even affect the government’s hold on power,” he said.
Policy makers have made managing “inflation expectations” a key task for this year. February’s gain in consumer prices was 2.7 percent, compared with Wen’s target of about 3 percent for the year. Zhou said yesterday that while the increase was a little higher than forecast, it hadn’t altered the central bank’s plans.
China’s goal is to grow without stoking inflation and while adjusting an economic model that has led to an “‘unbalanced, uncoordinated and unsustainable’’ expansion, Wen said. Officials will maintain ‘‘appropriate and sufficient’’ liquidity and keep interest rates at ‘‘reasonable’’ levels, he added.
Tibet, Taiwan
Wen blamed strains in China’s relationship with the U.S. on President Barack Obama’s meeting with the Dalai Lama and American arms sales to Taiwan. He expressed hope for an improvement in ‘‘our most important diplomatic relationship.”
Asked about increasing dissatisfaction among foreign businesses in China over the investment climate, the premier sought to reassure international investors.
In January, Mountain View, California-based Google Inc. said it may close down its Chinese Web site because of alleged cyber attacks and China’s ongoing online censorship.
“China will unswervingly pursue the policy of opening up to the outside world,” Wen said. “Foreign businesses are welcome to come to China to set up businesses according to the law.”
1 comment:
It has been analyzed and established the facts that:
“Theoretically, the appreciation of a country’s currency could resolve the issue of favourable or unfavourable trade balance but this had not been the case for Japan and China”.
“The yen appreciated 25.4% in 1985 from the previous year and followed by 25.3% in 1986. But, its global trade surplus still increased from about seven trillion yen in 1984 to 13.7 trillion yen in 1986.
“From the Japanese experience, the yen’s appreciation didn’t address its problem of favourable balance of trade.
“As for China, our currency appreciated 3.35% in 2006, 6.9% in 2007 and 6.88% in 2008 after the currency exchange reform. Our trade surplus continued to grow from US$162bil in 2004 to US$295bil in 2008,”
Therefore, simply revalue the China's currency rate would not solve US trade deficits.
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