Carrots and sticks on the
yuan By Antoaneta Bezlova
BEIJING - The rise of China as a globally
pivotal economy has encouraged a chorus of ever
louder demands from other major economies that
Chinese policymakers shoulder more
responsibilities about the value and behavior of
their currency - the yuan.
The foreign
camp, led by the United States, has offered China
a greater share of voting power on the board of
the International
Monetary Fund (IMF) -
long a domain of developed economies - hoping that
this new stature would play a double role as an
incentive and pressure for Beijing to revalue
its currency upward.
At the annual meeting
of the IMF, set to take place in Singapore this
month, financial leaders will vote on whether
China, along with three other fast-growing
economies - Mexico, South Korea and Turkey -
should be given more say in setting policies on
global economic matters, including how to deal
with cases of currency manipulations by individual
countries.
Many American politicians see
the ballooning bilateral trade deficit with China
- US$202 billion in 2005 and 24% higher than in
2004 - as proof that China keeps its currency
artificially low, giving its domestic exporters an
unfair advantage over US business and causing US
job losses.
They have repeatedly called
for a sizable upward adjustment of the Chinese
yuan and urged the administration of President
George W Bush - so far unsuccessfully - to
designate China as a "currency manipulator" and
impose trade sanctions.
But while Beijing
is keen to boost its voting power at multilateral
bodies to reflect the increasingly central role
China is playing in the global economy, Chinese
policymakers are emphasizing that there won't be a
tradeoff in regard to the currency issue.
In interviews and remarks in the run-up to
the IMF meeting set for September 11-20, top
Chinese leaders and senior researchers have
stressed policy independence on the currency
front. The yuan's movement will be determined by
domestic priorities and not by international
pressure, they say.
China should allow for
currency flexibility but "firmly avoid
appreciation of the yuan", Wang Xiaogang, a senior
researcher with the National Development and
Reform Commission, the country's top policymaking
body, said this week.
"Given that
industrialization is not yet finished, and
especially that our capital and
technology-intensive industries are not
competitive on the international markets yet,
either gradual or rapid appreciation will add to
uncertainty to the macroeconomic environment and
hurt the competitiveness of Chinese industries,"
Wang commented in the official Shanghai Securities
News.
In July 2005, China dropped the
yuan's decade-long peg to the US dollar in favor
of a link to a basket of currencies, which
resulted in an immediate upward revaluation of
2.1%.
This, however, was not enough to
satisfy politicians in Washington who had demanded
appreciation by 30-40%. Since then, the yuan has
remained unusually stable, giving rise to
accusations that the Chinese government is still
pegging its value. Defending his country's
currency record, Premier Wen Jiabao said this week
that the pace of the reforms would be set by
Beijing. "We will continue to deepen reforms of
the renminbi [yuan] exchange-rate mechanism, but
there will be no more 'surprise adjustments'," Wen
told foreign media ahead of his upcoming visits to
three European countries.
The Chinese
government is worried that allowing the yuan to
appreciate too rapidly could risk the stability of
the domestic economy, especially the large
export-oriented sector, creating more unemployment
and increasing social unrest.
The approach
of the IMF meeting, however, has fanned
speculation that China might become more
responsive to external pressure for the
appreciation of the yuan. The yuan set a
post-revaluation high against the US dollar in the
past two weeks, rising faster in August than in
the period between its de-linking last July and
the end of last year.
But analysts say
there could be domestic reasons for the faster
pace of appreciation allowed this summer, as
policymakers are using the currency mechanism as
part of measures aimed at cooling China's
scorching economic growth.
In the first
half of the year, the Chinese economy's growth
surpassed 10% despite the government's talk of
engineering a "soft landing". While Beijing wants
fast growth to create employment, it has become
worried by the political problems with its trading
partners created by ballooning trade surpluses.
A stronger yuan would boost export prices
and lower import costs, thus narrowing China's
trade surplus. But a stronger currency could hit
the most vulnerable hard - China's hundreds of
millions of farmers, driving them deeper into
poverty by allowing a flood of imported
agricultural products.
"They [Chinese
policymakers] must carefully weigh the benefits of
a much stronger renminbi - reining in
over-investment and appeasing [the US] Congress -
with the costs," argued Xu Sitao, an economist
with the Economist Intelligence Unit Corporate
Network.
While the US has accused China of
"economic nationalism" by intervening to keep its
currency steady, the United Nations Conference on
Trade and Development has endorsed China's policy.
Mere economic reforms and deregulation promoted by
multilateral bodies such as the World Bank and the
IMF have failed to create enough growth and reduce
poverty, UNCTAD said in its annual report last
week.
It called on developing countries to
emulate China's way of government intervention in
the foreign-exchange market, interest rates and
capital flows as ways of strengthening their
national economies.
The report said
China's growing domestic demand was playing a
vital role for the growth in the developing world
and warned that the process "must not be
derailed".
"Therefore renminbi revaluation
should continue gradually rather than abruptly,"
it said.
