China sings an old refrain
for Paulson
By Wu Zhong, China Editor
HONG KONG - China will stand firm on its gradualist approach to changing the
exchange rate of the yuan, despite intensified domestic and foreign pressure to
revalue it. That is the message US Treasury Secretary Henry Paulson received
loud and clear during his four-day visit to the country.
China's ever-growing foreign-exchange reserve has become a
source of increasing concern for the leaders in Beijing.
The Study Times weekly, an official publication of the Central Party School,
published an article by Vice President Zeng Qinghong - who is also president of
this top training center for senior Communist Party and government cadres - in
which Zeng revealed that the foreign-exchange reserve had reached US$954.4
billion.
"Although this shows the strength of our country's economic muscle, it
increases the risk of the [yuan's] exchange rate and the pressure on the
revaluation of the yuan," Zeng wrote. This was the first time a top Chinese
leader had clearly stated that the ever growing foreign-exchange reserve may
not be such a good thing for the country.
But the major contributor to the growing foreign-exchange reserve is China's
huge trade surplus. There is no sign indicating that the trade imbalance in
favor of China will be narrowed in the foreseeable future. The trade surplus
hit a record $18.8 billion in August. And now it is widely expected that the
foreign-exchange reserve is likely to top $1 trillion by mid-October and will
reach $2 trillion by 2010 if no action is taken to achieve more balanced trade.
Under such circumstances, it is natural for China's major trade partners, the
United States in particular, to push for the revaluation of the yuan in the
hope that this would help reduce their trade deficits with China.
But many Chinese officials and economists have maintained that the trade
imbalance could be corrected in other ways. For instance, Beijing would like to
see Washington ease its tough restrictions on technology transfers and exports
of high-tech products to China.
"China is importing basically whatever the US government allows [companies] to
sell to us. We export millions of pairs of jeans in exchange for a Boeing 747
airplane. If the US can sell more high-tech products, its trade deficit with us
can be easily narrowed,'' said an economist in Beijing.
But fearing that China may use US technologies to modernize the People's
Liberation Army, Washington has so far stood firm on the issue.
So a new round of haggling over the yuan's exchange rate began this month when
Paulson prepared for his visit to Singapore to attend the annual meetings of
the International Monetary Fund (IMF) and World Bank.
On September 13, a week before he arrived in China, Paulson urged Beijing to
undertake a broad range of economic reforms and to make the yuan more flexible.
But Paulson, a China expert who made 70 trips to the country as head of US
investment-bank giant Goldman Sachs, also sought to lower expectations that he
would achieve any major breakthroughs in his talks with Chinese officials.
His remarks fueled expectations that in the IMF's and World Bank's annual
meetings and during his visit to Beijing, the US treasury secretary would
pressure Chinese authorities to let the yuan appreciate further.
As if to respond to Paulson's comments, on the same day, Su Ning, vice governor
of the People's Bank of China (PBoC, the country's central bank) told a
financial forum in Xianghe, a city near Beijing, that the government should
push forward with reform of the yuan exchange-rate regime and make the currency
more flexible.
This immediately caused the yuan to climb. On September 14, the yuan closed
higher at 7.9460 to the dollar, up from the previous day's close of 7.9496,
after the central bank set the midpoint at 7.9476 on the morning of September
14 compared with 7.9555 of the last session.
At the IMF's and World Bank's annual meetings, Zhou Xiaochuan, governor of the
PBoC, said that whether the yuan's float band would be widened depended on
whether there was a demand for it in the financial markets.
Zhou said that if the yuan's exchange rate rose or dropped sharply, it meant
the current floating band was narrow. Supply and demand would determine whether
and when the floating band would be expanded, he said.
"This will entirely depend on the foreign-exchange market. It has nothing to do
with whether the Chinese government is seeking any interest" from it, Zhou
said. But he refused to disclose when the move would be taken. "It is not
convenient right now to disclose whether there is a timetable,'' Zhou said.
Zhou's remarks immediately boosted the yuan's exchange rate. On Monday, the
currency at one point hit a record high of 7.9200 to the US dollar.
Back in Beijing, at the first session of the China-France financial and
economic forums on Wednesday, Zhou reiterated that there was still no timetable
for a further widening of the daily floating band between the yuan and the
dollar.
But the yuan hit a new high against the greenback on close on Thursday for the
sixth consecutive day of trading. The central parity rate of the yuan closed at
7.9264 yuan to $1 on Thursday.
China set a floating band of 0.3% when it launched a reform of the yuan's
exchange-rate system in July last year. The floating band allows the yuan to
rise or fall 0.3% on the inter-bank foreign-exchange market.
On Monday, the yuan's value against the dollar on the inter-bank market rose
0.29% from the central parity rate.
Widening the floating band would make both investors and speculators more
cautious, which would help stabilize the yuan, said Tan Yaling, director of the
China International Economic Relationship Society. However, it depended on the
timing, she was quoted by the Xinhua News Agency as saying.
In her view, the recent rise in value of the yuan could also be considered a
response to the decision on Wednesday by the US Federal Reserve to keep
interest rates unchanged for the second month in a row. Tan said the future
effects were likely to be limited.
Zhou's remarks have made it clear that China will not make any move to revalue
the yuan but would rather gradually widen the currency's float band and let
market forces determine its value.
The Beijing economist said gradualism has been the key to the success of
China's economic reforms over the past two decades. "And certainly, the Chinese
government now wants to adopt a gradualist approach toward the yuan's exchange
rate, which is wise considering China's own circumstances," he said.
China has learned a valuable lesson from Japan. The sharp revaluation of the
Japanese yen in the 1980s eventually led to an economic recession from which it
is still struggling to recover. At this stage, China cannot afford any
significant slowdown of economic growth. A recession caused by the yuan's
revaluation would mean a social disaster for China, the economist said.
Paulson probably understands this. He said in Beijing on Wednesday that he was
not concerned about what method China used to make the yuan more flexible.
On Friday, the yuan rose at the fastest weekly pace since July last year as
Paulson met with Chinese President Hu Jintao, who greeted him by saying they
were "old friends". Paulson also met with Premier Wen Jiabao.
After his meetings with Wen and Hu, Paulson said the US and China agreed on the
need for a more flexible yuan and other economic policies, while disagreeing on
when to implement the changes, according to Bloomberg. "There are very few
differences on the principles," Paulson told reporters, wrapping up his
four-day China trip. "Where there is discussion, it's on timing."
The US treasury secretary's remarks are evidence that he failed to persuade
Chinese leaders to give up their gradualist approach.
It is now widely expected that Beijing's gradualist approach will result in the
yuan climbing to 7.80 to the greenback, the same value as the Hong Kong dollar.
