Despite US Pressure, Beijing Stands Firm in Currency Spat
Friday 26 March 2010
by: Kit Gillet | Inter Press Service
Beijing – China may be under international pressure, especially from the United States, over the valuation of its currency, but is unlikely to back down in the short term given its worries about its export sector and the jobs that depend on it.
Thus far, the lines have been drawn in the disagreement between China and the United States over the yuan – and neither side seems willing to back down.
China pegged its currency at approximately 6.8 to the dollar in July 2008, mainly to aid the country’s export industry that was badly hit by decreasing global demand and the financial crisis.
On Mar. 15, 130 members of the U.S. Congress signed a letter urging the White House to label China a currency manipulator in its Apr. 10 treasury report, which would be the first step in imposing trade tariffs on Chinese export goods.
The letter stated, “The impact of China’s currency manipulation on the U.S. economy cannot be overstated.” It went on to suggest that the current exchange rate gave an unfair subsidy to Chinese companies at the direct expense of their U.S. counterparts.
China’s Commerce Minister Chen Deming has said the country would “not turn a blind eye” if it was labelled a manipulator, and that it might, in that eventuality, seek to litigate under the global legal framework.
Both countries’ leaders have also weighed in on the issue.
Yet China is unlikely to allow a rapid appreciation of the yuan, which some suggest is undervalued by as much as 40 percent.
“China believes that that a modest revaluation of its currency would have a scant effect on U.S. trade deficits, and that once it made an adjustment, it would be pressed again and again to do more,” wrote Jeff Garten, Juan Trippe professor of international trade and finance at the Yale School of Management, in a recent note.
As the world’s largest exporter, China’s growth depends substantially on its export sector. Any strong revaluation could hurt this industry, which accounted for roughly 27 per cent of Gross Domestic Product in 2009.
“It is in nobody’s interest – China’s, the United States’ or other countries’ – to see big ups in the renminbi (yuan) or big downs in the dollar,” Vice Commerce Minister Zhong Shan told the U.S. Chamber of Commerce in Washington on Wednesday.
“There is no need for us to discuss if it (the yuan) should be appreciated. What we should be concerned about is when and how it is,” Wu Xiaoqiu, assistant president of Renmin University and director of China’s Finance and Securities Institute, said in an interview with IPS. “The government needs to consider the competitiveness of companies in labour-intensive sectors,” he said.
The leading business publication ‘The 21st Century Business Herald’ reports that several government ministries, including the ministries of commerce and information, have been conducting pressure tests to gauge the impact of appreciation in key labour-intensive sectors, but none of their findings have yet been made public.
“Most export companies would rather have the yuan appreciate in one go rather than face the uncertainty of guessing the timing and the degree of gradual appreciation,” said Zhang Bin, a researcher at the Institute of World Economics and Politics, Chinese Academy of Social Sciences.
But Zhang expressed concern that some exporters might report fake figures in order to protect their own interests.
China’s export industry suffered in the wake of the economic crisis, and while numbers picked up near the end of last year, Chinese officials are now suggesting that March 2010 could be the first month since 2004 that the value of the country’s imports exceeded that of its exports.
Cheaper competition from developing nations such as Vietnam and Bangladesh, along with a 2008 labour law that increases wages across China, has already hurt the Chinese export industry. Talk of a revaluation is seen by some as a hurdle too far.
“In the words of some of our members, the United States is ‘sharpening its knives and has a murderous air about it,’” said Zhang Yujing, president of the China Chamber of Commerce for Import and Export of Machinery and Electronic goods, at a press conference last week. “I expect many companies won’t be able to bear an appreciation now.”
Zhou Dewen, vice president of the China Middle and Small Enterprises Association, told the ‘Oriental Morning Post’ that the Chinese government should withstand pressure from abroad for at least two or three years.
“If the government fails, a large amount of middle and small Chinese enterprises, which have suffered from the ongoing financial crisis, will be closed and the workers will lose their jobs,” he said in an interview published in the ‘Post’ this week.
Not all share Zhou’s pessimistic view.
“An appreciation will hurt exports. But if appreciation is gradual and modest (we are talking about five to six percent here), I think the impact should be relatively small,” Wang Tao, head of China Economic Research for Union Bank of Switzerland (UBS) Investment Bank here, told IPS.
Wang suggested that yuan appreciation, along with more flexibility, can help promote domestic consumption in China, and divert investment from export-oriented industries.
Chinese exporters are estimated to make a return of three to five percent on sales. Any substantial appreciation of the yuan could see the closure of many factories and would add to China’s unemployment rate, which a recent China Academy of Social Sciences report put at 9.4 percent.
It would also force the raising of export prices, which would in turn affect U.S. consumers, by far the largest buyer of China-made products.
Decades of free spending by U.S. consumers has left the U.S.-China trade deficit standing at roughly 227 billion dollars, down from a high of 268 billion dollars in 2008.
Chinese state media and many of its politicians have suggested that the U.S. government is merely looking for someone else to blame for its current woes. “They should not blame the problems they have by finding a scapegoat in China,” China’s new ambassador to the United Nations, He Yafei, told a briefing in Geneva earlier this month.
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