SPEAKING
FREELY Beijing takes mini-step to
free-float currency By Richard
Colapinto
Speaking Freely is an Asia
Times Online feature that allows guest writers to
have their say. Please click here
if you are interested in contributing.
NEW YORK - The People's Bank of
China (PBOC) recently announced that it would
widen the daily trading limit of its currency, the
yuan, against the US dollar from 0.5% to 1.0%.
This would allow the yuan to fluctuate in a wider
range around a central parity rate set each day by
the government.
As the new policy somewhat
relaxes the controls over the currency by the
government, it comes at a time when the economy is
showing signs of slowing amidst the most significant
political turmoil
occurring inside the Communist Party since the
Tiananmen Square protests of 1989.
China
has long been blamed by the United States for
deliberately keeping its currency undervalued
against the dollar in order to provide support to
its export sector. But, since July 2007, when the
PBOC announced the initial 0.5% trading limit, the
yuan has appreciated some 30% in nominal terms
versus the dollar.
Now that China has
relaxed the band even further it is not out of the
realm of possibility to see the yuan appreciate
further, even though the market has largely yawned
at this policy announcement judging by the first
few days of initial trading of the currency.
However, with the Chinese economy showing
signs of contraction - it reported that its first
quarter gross domestic product came in at 8.1%
growth year-on-year, below consensus forecasts of
8.4% and less than the 8.9% in the fourth quarter
of 2011 - the government is pressing forward with
economic reforms with the goal of
internationalizing the currency.
These
reforms are evidence that the central government
is not worried about a hard landing or a rapid
appreciation of the yuan. Premier Wen Jiabao,
during his press conference at the end of the
National People's Congress session in March,
stated that China's debt was at fairly low levels
compared with other developed and emerging market
economies and that China would continue with its
currency reforms as the yuan was now close to its
fair value.
Premier Wen has also expressed
his frustration with the size of the state-owned
banks and, perhaps now, with an eye to his and
President Hu Jintao's legacy, they have decided to
take deeper steps in economic reform during the
leadership transition this year in China.
The timing of the reforms probably have
more to do though with the calendar than anything
else. This is a presidential election year in the
US, and China's trade practices have already come
up as issues during the Republican primaries, with
the candidates trading barbs of who would be
tougher with China if he were elected president.
By loosening control of its currency, the Chinese
government is taking a step to mitigate criticism
of the strength of the yuan before the campaign
heats up this fall.
In addition, the
International Monetary Fund (IMF) and the World
Bank are holding their spring meetings this week
in Washington DC. China's announcement, coming
just as the meetings get underway, is intended to
deflect criticism emanating from the IMF on the
currency. Indeed, IMF managing director Christine
Lagarde came out with supportive comments about
China's move after the PBOC announcement.
One should not underestimate the role that
domestic politics plays in this announcement
either. As mentioned, the Party is undergoing what
many believe is the most wrenching internal
turmoil since 1989.
Coming on the heels of
the downfall of Bo Xilai, the former populist
leader of the Chongqing municipality now under
house arrest and whose wife is under investigation
over the death of British businessman Neil
Heywood, the reformers are consolidating control
inside the Party. The currency move makes it clear
that they are moving forward with economic reforms
with the goal of moving China away from its
unsustainable export-driven model to one that
emphasizes a greater role for domestic
consumption.
Even with the leadership
embracing economic reforms at the present, it is
difficult to forecast the government's commitment
to seeing them through in the event of a backlash
from status quo interests in the country if the
yuan appreciates to levels against the dollar that
squeezes the competitiveness from China's
state-owned enterprises.
The reformers
have apparently calculated that with the softening
in the economy there is less of a risk in
implementing the reforms now than with continuing
the state-centric economic policies into the
foreseeable future. If it were to stay wedded to
the policies that fueled China's growth model, it
would clearly increase the risk of the economy
over-heating sometime down the road and
endangering the position of the Party.
In
conclusion, even though this currency policy moves
China closer toward the government's often stated
goal of internationalizing the yuan, the process
remains difficult and long. For instance, it still
needs to take much-needed reforms in its banking
system, allowing in the free flow of various forms
of capital without restrictions, as well as its
legal system in conjunction with liberalizing its
currency controls.
The open question is
whether the government has the will to see the
reforms through when the road gets rocky and the
vested interests in the country put up resistance.
That remains to be seen.
Richard
Colapinto writes about Japanese economics,
politics and foreign affairs for The Atlantic
Sentinel. He is also a contributing analyst for
the geostrategic consultancy firm Wikistrat where
he covers macroeconomics and the Asia-Pacific. He
has 11 years' experience on Wall Street as a hedge
fund trader and a Master's degree from New York
University in international relations where he
focused on East Asia.
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Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here
if you are interested in
contributing.
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