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China planning currency
moves
By Antoaneta Bezlova
BEIJING - Despite repeated calls by the
United States and other Western powers for an
upward revaluation of the Chinese currency, the
yuan, Beijing has refused to budge on its stance
that the currency is a matter of national
sovereignty - meaning that increased pressure from
abroad is likely to provoke greater resistance to
change. But behind the facade of defiance, Beijing
is preparing the financial system for a more
flexible currency system that would allow the yuan
to fluctuate within a wider band, and is trying to
instill a sense of greater urgency in these
preparations. Since 1994, China has fixed the yuan
exchange rate at about 8.28 yuan to one US dollar,
intervening to prevent any large fluctuation.
Ironically, Beijing's readiness to act on
the currency front comes just as many in the
United States are beginning to realize that while
calls to revalue the yuan have a strong populist
appeal, revaluation would have only a limited
effect on the US trade deficit with China, valued
at US$160 billion. US Federal Reserve Chairman
Alan Greenspan warned Congress last week that a
rush to impose punitive tariffs on imports from
China would harm US consumers and protect "few, if
any American jobs".
US manufacturers
contend the Chinese currency is undervalued by as
much as 40%, making the country's goods cheaper in
the US market and US products more expensive in
China. Some lawmakers have forwarded a proposal to
impose a hefty 27.5% tariff on imported Chinese
goods if Beijing does not move to a more flexible
currency system. But Greeenspan rebuked the
legislation, which has gathered support from
two-thirds of the US Senate, saying it would harm
the US economy by driving up prices of imported
goods.
According to former US Senator Bob
Kerrey, understanding is growing in the United
States that forcing a Chinese currency revaluation
will not be a panacea for US economic pains. "I
don't think we have responded adequately to
globalization, and the consequence is social
insecurity that translates into fear [of]
economies like China's," Kerrey told media at a
press briefing in Beijing last week. For China,
this and Greenspan's warning justify the
government's intransigence on the currency.
Chinese economists have long agreed the United
States has little to gain economically from a
higher yuan, either in terms of protecting its
manufacturing industries or reducing its current
account deficit, which they argue is a legacy of
US consumers piling up debt to finance current
consumption.
To Beijing, therefore, US
pressure stems more from the need to find a
scapegoat for what are largely self-inflicted
economic wounds than from the "currency
manipulation" of which China is often accused.
This is why there is more than a tinge of
self-righteousness in Beijing's refusal to cave in
to US demands. Time and again, Chinese leaders
have insisted that revaluing the currency is a
sovereign matter and that pressure "will not help
solve the matter". People's Bank of China Governor
Zhou Xiaochuan said last weekend in Switzerland,
where he attended a central bankers' meeting, that
"the time is not ripe yet" to scrap the yuan's
decade-old peg to the dollar.
While
Washington is concerned about the short-term
outlook, Beijing has to manage long-term risks.
The Chinese leadership has to deal with major
domestic issues, including bad debts in the
banking sector; the big divide between rich
coastal provinces and the poor rural hinterland;
growing unemployment; controlling inflation; and
the conversion of state industries into more
efficient enterprises. The authorities fear that
any significant move on the currency front could
trigger a wave of money flooding into the country,
fueling inflation and sending stock markets into
an uncontrollable spin.
If the scale of
any revaluation is too great, China risks pricing
domestic companies, many of which already operate
on razor-thin margins, out of the market. The
National Bureau of Statistics has estimated that a
15% revaluation could turn export growth negative
this year. A 3-5% revaluation would slow export
growth to less than 10% in 2005, from 35% last
year. Such changes would surely result in such
potentially serious consequences as unemployment
and even social unrest. Another painful
side-effect could be the bursting of China's real
estate bubble by ending flows of speculative money
into the national property market.
Millions, even billions, of dollars of
foreign speculative funds have poured into China
in anticipation of windfall profits that will
accompany an eventual revaluation. Some pundits
have predicted a spectacular adjustment of up to
25%. But most China experts predict an initial
change of between 3% and 5% by the end of 2005.
Even here, though, the battleground is fraught
with danger. Foreign investors may see a small
adjustment in the currency as a precursor to an
even bigger move, bringing more speculative
foreign capital to China and increasing the risks.
Others say the government will introduce a
basket-based system of currencies and allow the
renminbi to rise against the dollar just 1-2%
initially, thus allowing the country to continue
reaping the benefits of its strong trade
performance.
Whatever the chosen path,
China's leaders appear to have concluded that
renminbi revaluation is a contingency. More and
more economists have raised voices in support of
currency adjustment, arguing the country has
"already lost its best opportunity to revalue".
"The economic and social price of yuan revaluation
is climbing higher by the day," senior economist
Liang Hong wrote in the China Economic Times,
which is published by the State Council, or
China's cabinet. "As more 'hot money' flows into
the country and the trade surplus grows worse, the
task at hand becomes more complicated."
Giving plausibility to speculation that a
more flexible currency mechanism is forthcoming,
the Chinese Foreign Ministry said last week that
president Hu Jintao might discuss the exchange
rate when he meets with leaders of the Group of 8
(G8) leading industrialized nations in Gleneagles,
Scotland from July 6-8. But Premier Wen Jiabao
warned that revaluation was not imminent and that
Beijing needed more time to prepare the country's
financial system for possible shocks from the
exchange rate reform.
(Inter Press
Service) |
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