The International Herald Tribune | www.iht.com China unlikely to budge on yuan peg, analysts say Yumi Kuramitsu and Eugene Tang Bloomberg News Monday, July 21, 2003
China will very likely face new calls to let its currency strengthen when 25 trade ministers from Europe and Asia meet this week in the Chinese port city of Dalian. But analysts say that Beijing's focus on domestic considerations means it will not budge. With millions of Chinese seeking work and millions more at risk of losing their jobs as the economy shifts from state control to private enterprise, the country counts on a weak currency to keep exports flowing, raise household incomes and avoid political unrest, the analysts say. So it will probably resist pressure at the three-day Asia-Europe Meeting to revalue the yuan from the fixed rate of 8.3 to the dollar, where it has been for eight years. "China needs to peg its currency to maintain economic and political stability," said Michael Preiss, Hong Kong-based chief investment strategist at CFC Securities. Thanks to the peg, the yuan has tracked the 7.3 percent decline of the dollar against major currencies this year, making China's goods more competitive in many markets. Officials in Japan, America and Europe have called for China to loosen the peg. The U.S. Federal Reserve chairman, Alan Greenspan, told Congress last week that the yuan was undervalued. Romano Prodi, president of the European Commission, said it was in the interests of both China and Europe "not to have too many imbalances in long-term trade," Market News International reported on Friday. Finance Minister Francis Mer of France told journalists that Europeans' currency concerns were focused not just on the euro-dollar rate "but also the euro, dollar, yen and yuan." While the Dalian meeting, which begins Tuesday, is officially focused on economic cooperation, it should give China's trade partners a chance to convey their message directly. Those due to attend include the European Union trade commissioner, Pascal Lamy, the French trade minister, Francois Loos and the Philippines' trade and industry secretary, Manuel Roxas. Several analysts, though, say there is little prospect that President Hu Jintao installed only in mid-March, will make any big changes in China's currency policy. The trade boost from a weakening currency, which makes Chinese goods less expensive abroad, has helped Asia's second-biggest economy grow 8.2 percent in the first half of 2003, the most of any major country. Exports contribute a fifth of China's gross domestic product, and the country relies on trade "not only for growth but also for jobs," said Mike Moran, an economist at Standard Chartered Bank in Hong Kong. "It's very difficult for international pressure to engineer a more flexible policy or stronger yuan in the near term." Other analysts point to China's falling domestic prices and the composition of its trade as additional reasons why its government will not bow to international pressure. Stephen Roach, chief economist at Morgan Stanley, which set up China International Capital, China's first joint-venture investment bank, said in a recent note to clients that China's trade partners risked "a serious mistake" by asking it to defuse the threat of deflation by strengthening the yuan, a move that would raise the prices of its goods in their economies. China itself faces deflation because excess output of clothes, televisions and home appliances is forcing companies to slash prices to lure domestic buyers. A stronger currency would make imports cheaper too, increasing the downward pressure on prices. Also overlooked, according to Qu Hongbin, an economist at HSBC Holding in Hong Kong, is the role of overseas investors in China's export gains. "Granted, China's share of global exports has more than doubled to almost 5 percent in the last decade, but 75 percent of the rise is attributable to foreign companies' operations in China," said Qu. That reasoning may not assuage China's trade partners. Four U.S. senators on Thursday urged Treasury Secretary John Snow to investigate whether China was hurting the U.S. economy by manipulating its currency. The U.S. textile industry may lose up to 630,000 jobs - more than 60 percent of its domestic work force - in 2005 and 2006 after the removal of quotas limiting Chinese imports at the end of 2004, according to a report last week by the American Textile Manufacturers Institute, an industry lobby group. Finance Minister Masajuro Shiokawa of Japan has urged China since February to abandon its fixed exchange rate and allow its currency to strengthen. "China can't ignore the demands of its trading partners," Fred Hu, managing director of Goldman Sachs Group in Hong Kong, said in an interview last week. "The question is how China can move to a managed float." Some investors have already begun betting on the possibility of a change in the exchange rate. In Hong Kong on Friday, forward contracts implied that the yuan, if freely traded, would strengthen to 8.114 against the dollar in 12 months. Still, "I don't see China doing anything," said Stuart Goh at Pacific Asset Management in Singapore. "The United States has been targeting China. You think China's bothered? No way."
