BEIJING - Recent downward movements of the Chinese yuan have been interpreted
in Beijing as political statements aimed at the incoming administration of US
president-elect Barack Obama indicating that it should respect China's
sovereignty rights on the currency issue.
Obama, when a candidate for the US presidency, accused China of keeping the
value of its currency artificially low to protect the competitiveness of its
export prices.
"Little concrete results can be expected to be achieved with a lame duck
administration," said independent economist Xie Guozhong. "That is why Beijing
chose this time to send a strong
signal to the incoming US administration that they need to be more considerate
about China's needs to maintain its currency stable."
But there are signs that the yuan's sharp fall last week is more than just a
salvo in a tense diplomatic exchange, and that, not unlike the US during the
Great Depression, China is trying to export its way out of the economic crisis.
"China can go through its own version of the 1930s' Great Depression," argues
Michael Pettis, professor of finance at Guanghua School of Management at
Beijing University.
According to Pettis, Beijing's recent moves - increasing subsidies to exporters
and halting appreciation of the yuan - bear similarities to the ways the US
sought in the 1930s to export its problem of overcapacity.
Beijing exercises heavy control over the yuan's value. While most Asian
currencies (except the Japanese yen) have fallen against the US dollar in
recent months, the yuan has remained stable.
China gained considerable political credit from its decision during the 1997-8
Asian financial crisis to keep its currency stable and often reminds its
neighbors of that effort. Nor have Chinese officials discouraged expectations
that they would repeat this feat during the current economic crisis.
But then the Chinese yuan fell by its maximum daily trading limit of 0.5%
against the US dollar for two consecutive days last week - the largest such
change since China ended its effective peg to the US currency in the summer of
2005.
An editorial in the China Times newspaper was emphatic: "The currency move is a
political signal aimed at the Obama administration not to exercise more
pressure on China to revalue its currency.''
The sudden and steep fall of the yuan on December 1 came ahead of the latest
round of biannual US-China strategic economic dialogue held in Beijing, where
US Treasury Secretary Henry Paulson was expected by some economists to raise
the heat on his hosts to speed up the appreciation of the Chinese currency.
China has been under immense pressure from its trade partners in the West to
allow the yuan to appreciate and thus reduce its huge trade surplus. Over the
past two years, China allowed the yuan to gain value relative to the dollar.
That process has come at a high price, hitting Chinese exporters who were
already struggling with rising costs and slumping global demand.
In mid-November, Zhou Xiaochuan, governor of the People's Bank of China, said
that he could not rule out a depreciation of the yuan if the external
environment remained tough for Chinese exporters.
His statement was followed by comments by President Hu Jintao that China was in
danger of losing its completive edge in trade. Speaking to a regular study
session of top Communist party officials, Hu warned that the economic crisis
was testing the government's ability to steer the country through simultaneous
global recession.
Several weeks ago Beijing announced a stimulus package of 4 trillion yuan
(US$586 billion) in government and private-sector spending on public works and
social programmes but little of that package is aimed at helping the collapsing
exporters.
The yuan's drop came amid signs that the economic slowdown was hurting the
country's exports more than had been previously envisaged. In southern China,
where the main manufacturing hubs are based, hundreds of factories have gone
bust, throwing thousands of workers on the streets.
November trade figures were expected to be released on Wednesday and experts
anticipate export growth will be negative.
The Ministry of Commerce's latest trade outlook report warns of more closures
amid plunging global growth rates. "The situation will get even more
complicated, and there will be more uncertainties in 2009,'' the report said.
Exports have accounted in recent years for about one-third of the country's
growth in gross domestic product. Beijing has been trying to shift gears and
boost domestic consumption as the new driving force for growth but change has
been slow.
In the days after the currency drop, speculation grew that Beijing was going to
adopt a long-term weaker yuan policy to try and bail out its struggling
exporters.
"There are still several leverages that the government could use to increase
exports including the exchange rate," said Pei Changhong, a trade expert, in
the "Blue Book of China's Economy", released by the China Academy of Social
Sciences.
Commerce minister Chen Deming has rejected suggestions that the drop in the
yuan was a deliberate government move to stabilize exports, saying it was due
to "purely market forces".
The yuan's value has been a perennial bone of contention between China and its
trade partners in the West, particularly the US, which says the low value of
Chinese currency has allowed Beijing to grow its economy at the expense of
competing countries' manufacturers.
China generates a huge trade surplus of goods and services, which last year
accounted for 9% of its GDP. As more and more economies enter recession,
Beijing's moves to use currency regime to ward off economic troubles are likely
to raise protectionist hackles in more than one country.
"They [the Chinese] can't get away with increasing their trade surplus and
exporting their over-capacity," says Pettis. "There would be a wave of
anti-China sentiment around the world".
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