China revalue news:

FE Edirorial: This yuan’s for Barack?
The Financial Express

Posted: Monday, Nov 16, 2009 at 2304 hrs IST
Updated: Monday, Nov 16, 2009 at 2304 hrs IST

The leading narrative of our time, which places the US and China at the apex of the global power game, demands that special attention be paid to Barack Obama’s first visit to China as US President. What we know almost for sure is that the two sides will not be discussing the Dalai Lama or Tibet—the Chinese prevailed on Obama not to meet the Dalai Lama in the US.

What they need to talk about, and will talk about, is economics. And not just trade wars over tyres, or retaliatory anti-dumping duties and other protectionist measures. Those are certainly important issues, but they are largely pure bilateral matters. From the point of view of the rest of the world, including India, what need to be the major talking points are exchange rates and massive trade imbalances, which are in fact closely linked.

There is fair consensus that one of the underlying causes of the financial crisis, which we are just about seeing the end of, was the massive imbalance created by the US that was living on cheap finance funded by foreign countries buying cheap goods from other countries. On the other side were the surplus economies, China being the largest, which were financing US consumption while under-consuming within.

Why China draws more attention than say Germany or Japan is because it manipulates its exchange rate to enhance its export competitiveness. The yuan is pegged (at what is generally agreed to be an undervalued amount) to the dollar. This distorts trade with the US. Ideally, a somewhat appreciated yuan will reduce Chinese exports and increase domestic consumption. It will also boost US exports and reduce local US consumption.

This will help correct some of the fundamental global imbalances more than any other policy measure. What makes the situation even more urgent from the point of view of countries like India is that the declining dollar (and hence yuan) is making exports from emerging economies other than China very uncompetitive. It is also forcing central banks to buy dollars to prevent excessive appreciation of the exchange rate.

So, if Obama presses the Chinese to revalue their currency, he will not only address the US-China imbalance, but he will also help address the perverse effects of a falling dollar on the real economies of other emerging economies. Of course, there is no obvious reason for the Chinese to agree to this. They stand...

Obama visits the vital partner

IN RECENT days President Obama, ahead of his arrival in Beijing yesterday on a nine-day sweep through east Asia, described China as a “vital partner, as well as a competitor”. The formula is a significant contrast to the George W Bush description of the relationship as one of “strategic competitors”, reflecting above all an evolving understanding of the complex interdependence and economic interpenetration of the world’s two great powers.

China holds more than $1 trillion of US debt and the latter is currently, the single-biggest market for China’s export hungry economy. The country is both the world’s largest producer of many cheap goods that Americans hardly make at all now – tee shirts and toys, for example – and a favoured place for US multinationals to assemble more complex products for the US and other markets. Some 60 per cent of Chinese exports accrue to foreign-invested enterprises – most of the value added, and thus most profits, accrue to these multinationals, not to China. Gone are the days when the US could simply look at the relationship as “them and us” – now them is us.

Substantive matters on a crowded bilateral agenda include US hopes that China will revalue its currency and encourage consumers to spend more, opening markets further to US goods; climate change; efforts to strengthen a still-fragile global economy; trade friction over new US duties on tyres and steel pipes; North Koreas nuclear programme; the war in neighbouring Afghanistan; and Pakistan, a long-standing ally of China that is at the centre of Obamas foreign-policy concerns. Mr Obama is also expected to raise the thorny issue of China’s human rights.

Pre-empting his inevitable expressions of concerns about the yuan, currently in effect pegged to the sliding dollar and causing US, EU and regional exporters considerable pain, China hinted last week that it might allow appreciation of its currency, though few believe it will do so in the short-term. But the pressure is increasing. Finance minsters of the Asia-Pacific Economic Co-operation group, which includes China, the US, and Japan, last week “agreed that flexible prices, including exchange rates and interest rates” are important to achieving “sustainable global growth”.

Mr Obama’s broader message to the region is that, after what many see as years of neglect under Bush, the US is determined to re-emphasise its identity as a Pacific nation and to re-engage. Having grown up in Hawaii and Indonesia, the president is the first president of the United States really with an Asia-Pacific orientation, Ben Rhodes, his deputy national security adviser insists. “He understands that the future of our prosperity and our security is very much tied to this part of the world.

But the region also knows that Mr Obama faces real difficulties back home in re-engaging. With unemployment at 10 per cent, Democrats in Congress are deeply unhappy about a liberalising trade agenda and reluctant to ratify deals like the still-pending 2007 US-South Korea trade agreement. Convincing Asia will take more than soft words.

KRACKER FIND:

IMF: China Has Key Role In Global Recovery

16/Nov/2009
RTT News

China will help to lead the world out of recession and also has a critical role to play in reforming the global economy, International Monetary Fund Managing Director Dominique Strauss-Kahn said on Monday.

Speaking at the International Finance Forum in Beijing, Strauss-Kahn also called on China to allow its currency to appreciate in order to bolster its economy, calling it a necessary reform.

"Allowing the renminbi and other Asian currencies to rise would help increase the purchasing power of households, raise the labor share of income, and provide the right incentives to reorient investment," Strauss-Kahn said in prepared remarks. "Higher Chinese domestic demand, along with higher US saving, will help rebalance world demand and assure a healthier global economy for us all."

IMF chief urges China to let yuan rise
(AP) – 1 hour ago

BEIJING — The chief of the International Monetary Fund said Tuesday that Beijing should let its currency rise as a stronger yuan would help China's development and ease global imbalances.

IMF managing director Dominique Strauss-Kahn's comments came as U.S. President Barack Obama was visiting Beijing amid strains over trade and China's currency. Washington says the weak renminbi, as the currency is also known, gives Chinese exporters an unfair price advantage, adding to the U.S. trade deficit.

"We do believe firmly in the IMF that the renminbi is undervalued, and that it is not only in the interests of the global economy but also in the interests of China to have revaluation of the currency," Strauss-Kahn told reporters.

A stronger yuan would help Beijing's effort to boost consumer spending and reduce reliance on investment and exports to drive growth, he said.

Strauss-Kahn met with Chinese officials during a two-day visit and said such a rebalancing is the government's goal. But he said he had "very little insight" into when Beijing might allow the yuan to rise against the dollar.

Beijing broke the yuan's direct link with the dollar in mid-2005 and allowed it to rise by more than 20 percent against the U.S. currency over the next three years. But that increase stopped in late 2008 as Beijing tried to help its exporters stay competitive amid plunging demand. The yuan has held steady against the dollar since then.

Strauss-Kahn said China has gained from stronger exports due to a weak currency that held down prices of its goods abroad. But he said the rest of the economy suffered distortions.

"If you have wrong prices you make wrong decisions, especially concerning investments," he said. "It's now time for China, having accumulated a lot of advantages from an undervalued currency, to look more forward to investment and long-term stability, and this long-term stability goes with getting rid of this distortion."

President Obama wants President Hu to allow his country's currency to rise

Jane Macartney, Beijing

President Barack Obama today urged his Chinese counterpart, Hu Jintao to allow his country’s currency to rise in value following strains over trade between the two economic giants.

After a summit in Beijing, Mr Obama took the opportunity to make public US expectations that China will let its yuan resume its climb against the dollar soon, but stopped short of voicing fears that China is keeping its currency artificially low to boost exports.

He said: “I was pleased to note the Chinese commitment, made in past statements, to move toward a more market-oriented exchange rate over time.”

Such action would be welcome in the United States and elsewhere, he hinted: “Doing so based on economic fundamentals would make an essential contribution to the global rebalancing effort.”

President Hu avoided any reference to the currency issue, instead delivering a thinly veiled reference to Beijing’s irritation at new US tariffs imposed on Chinese-made tyres, steel pipes and other products.

He said that they needed to "oppose and reject protectionism in all its manifestations" and both sides would need continued "consultations on an equal footing to properly resolve economic and trade frictions".

With the US unemployment rate at 10.2 per cent, one of Mr Obama's top priorities during his three-day trip to China is to press Beijing over the huge trade imbalance between the two countries, a move he believes would pave the way for greater US export opportunities.

Washington argues that an undervalued yuan is putting American manufacturers at a disadvantage and stoking global economic imbalances. The yuan has been pegged at about 6.83 to the dollar since July 2008.

Mr Obama’s reference to China’s "past statements" on currencies indicated President Hu might not have been forthcoming on how Beijing might respond. Mr Obama will have another chance to discuss the yuan's value and the possibility for an appreciation in talks with Premier Wen Jiabao tomorrow.

However, it is highly unlikely that Beijing would take any steps to revalue its currency during the visit of a US leader since it knows such a move would be unpopular at home because it would be seen by its people as caving into American pressure.

China’s central bank last week tweaked its description of how it manages the currency, setting off a firestorm of speculation that it might be willing to give the yuan some room to run, although market expectations of appreciation have remained muted.

Investors betting the yuan will soon rise may be disappointed as Beijing is likely to keep the currency on a tight leash at least until mid-2010 to cement China's economic recovery, analysts say.

But the chorus of calls on China to revalue is growing.

Dominique Strauss-Kahn, managing director of the International Monetary Fund, said today in Beijing that a stronger yuan would be in the interests of China and the world.

Pushing yuan could rock financial stability
Source: Global Times
[01:27 November 18 2009]


Currency seems to be more of a political issue than an economic one, especially when it comes to the Chinese yuan.

Speculation mounts whenever there is growing pressure for the yuan to appreciate. The huge inflow of "hot money" to China, totaling $219 billion in the past seven months, according to the latest statistics released by the People's Bank of China, illustrates how much pressure China has been under to revalue its currency. To some Westerners, the appreciation of the yuan is the key to solving the prickly problem of global trade imbalance.

But China has decided to resist the pressure. What the spokesman of China's Ministry of Commerce said Monday has helped cool the fevered pitch: The yuan exchange rate, not related to trade imbalance, should be kept stable, and the calls for the yuan to appreciate are unfair as other currencies are weakening.

Despite sounding like a warning issued to speculators, what the Ministry of Commerce reiterated is the government's long-held currency policy. China saw its currency appreciate roughly 21 percent between 2005 and 2008, and the pace of appreciation has always been adjusted to match its domestic economic conditions.

With the world economy at a critical juncture now, the mounting pressure on the yuan will not mitigate the trade imbalance, but could open the floodgates instead

As for the West, the yuan's sharp appreciation could shake the hard-earned financial stability after the collapse of Lehman Brothers. The Chinese-made merchandise ex-ported to the West consists largely of labor-intensive necessities. Should the yuan appreciate overnight, Western countries would need to either continue importing from China or find an alternative country to import from.

Either way, Western consumers would end up paying more for their necessities, which would harm Western domestic consumption and widen the trade deficit with China.

As for China, a chain reaction would take place following a sharp acceleration in the currency exchange rate, and could cause a deeper plunge in exports, higher unemployment, and so on.

China, a crucial player in the world's economy, has just started to show signs of an economic rebound, and a negative chain reaction would undoubtedly be a punch in the gut, damaging the finan-cial stability of China, and that of the world.

The ongoing upward pressure on the yuan is a red herring to divert the world's attention from the root cause of the financial crisis – mismanagement of financial institutions. The current concerted efforts to ensure recovery and to repair the financial system could thus be undermined. The impact could be as disastrous as manipulating currency.

It is without any doubt that lots of improvement needs to be made in China's currency policy. But it is always China's own choice to accelerate or slow the yuan's appreciation.

After all, the valuation of the Chinese yuan is in essence an economic issue, one vital to the financial stability of China, and of the world.

US lawmakers may penalise China over rigid yuan
By P. Parameswaran (AFP) – 14 hours ago
WASHINGTON — US lawmakers criticized US President Barack Obama's administration on Thursday for not pressuring China enough over its rigid currency as they set the stage for slapping import duties on Chinese goods.
As Obama returned home without any pledge from China to make its yuan flexible, Republican and Democratic lawmakers sent a letter to the Commerce Department calling for an investigation into "China?s currency manipulation."
It is "a potential first step in a process that could lead to significant, US-imposed tariffs on imports from China," said Democratic Senator Charles Schumer, who jointly wrote the letter with Republican Senator Lindsey Graham.
The Obama administration, like the Bush administration before it, has refused to brand China a currency manipulator under a law requiring it to determine whether any foreign economy manipulates its currency against the US dollar.
The bipartisan move Thursday asking for the probe was "an alternative path to formally rebuke China," Schumer said.
"If the agency determines that China?s currency practices amount to a form of subsidy that is actionable under international trade agreements, the Chinese could be subject to stiff penalties," he said.
Lawmakers and several industry groups claim that Beijing was artificially weakening the yuan value to boost its export competitiveness, a factor they blamed on the record 268 billion dollar trade deficit with China last year.
US Treasury Secretary Timothy Geithner faced tough questioning on the yuan issue from lawmakers Thursday during a hearing of the congressional joint economic committee, one of the rare legislative panels with both House of Representatives and Senate members.
"I just think it's time to get the stick out and say, 'Okay, we have to do something about this. This is going the wrong direction,'" Republican Senator Sam Brownback said.
Also Thursday, the US-China Economic and Security Review Commission, a congressional advisory panel, called on lawmakers to consider legislation "that has the effect of offsetting the impact on the US economy of China?s currency manipulation."
Geithner assured lawmakers he was confident China would allow its currency to be more flexible, citing a commitment Beijing had made to allow the yuan to fluctuate.
"China, as I've said many times, has committed to move," he said. "They understand they need to do it. I think they want to do it. And I'm actually quite confident they will do it."
Geithner acknowledged that China and several other Asian nations had intervened in the foreign exchange market, apparently to contain the rise of their currencies.
"The scale of intervention declined dramatically in the peak of the crisis. It started to increase again in China and countries around the world," he said, citing the latest financial crisis which peaked around the end of 2008.
Obama, on his maiden China visit, tactfully voiced US worries that China's yuan currency was being kept artificially low to boost Chinese exports.
"I was pleased to note the Chinese commitment, made in past statements, to move toward a more market-oriented exchange rate over time," Obama said as Chinese leader Hu Jintao looked on.
"I emphasized in our discussions, as have others in the region, that doing so based on economic fundamentals would make an essential contribution to the global (economic) rebalancing effort," Obama said.
Hu made no fresh offer of action.
International Monetary Fund chief Dominique Strauss-Kahn had said Beijing should let the yuan rise "sooner rather than later," saying it would benefit both China and the global economy.
"The renminbi (yuan) is undervalued. It's not only in the interests of the global economy but also in the interests of China to have a revaluation," Strauss-Kahn said in a trip to Beijing also this week.
The yuan's exchange rate with the dollar has been virtually at a fixed rate to the mostly weak US dollar since July 2008, three years after Beijing decided to abandon the Chinese currency's decade-old peg to the greenback.
Between 2005 and the summer of 2008, the yuan appreciated by about 21 percent, at which point Beijing set its value at around 6.8 to the dollar, said the US-China commission in its report.
"The RMB (yuan) remains undervalued," it said, adding that the extent of the undervaluation was hard to estimate because it has never been freely traded.

Death throes of a monster
Niall Ferguson and Moritz Schularick
From: The Australian
November 21, 2009 12:00AM

A FEW years ago we came up with the term "Chimerica" to describe the combination of the Chinese and American economies, which together had become the key driver of the global economy.

With a combined 13 per cent of the world's land surface and about a quarter of its population, Chimerica nevertheless accounted for a third of global economic output and two-fifths of worldwide growth between 1998 and 2007.

But we called it Chimerica for a reason: We believed this relationship was a chimera - a monstrous hybrid like the part-lion, part-goat, part-snake of legend.

Now we may be witnessing the death throes of the monster. The question US President Barack Obama should have been considering during his visit to Asia this week was whether to slay it or to try to keep it alive.

In its heyday, Chimerica consisted largely of the combination of Chinese development, led by exports, and US overconsumption. Thanks to the Chimerican symbiosis, China quadrupled its gross domestic product between 2000 and last year, raised exports by a factor of five, imported Western technology and created tens of millions of manufacturing jobs for the rural poor.

For the US, Chimerica meant being able to consume more, save less and still maintain low interest rates and a stable rate of investment. Overconsumption meant that between 2000 and last year, the US outspent its national income by a cumulative 45 per cent. Goods imported from China accounted for about a third of that.

For a time, Chimerica seemed not a monster but a marriage made in heaven. Global trade boomed and nearly all asset prices surged. Yet, like many another marriage between a saver and a spender, Chimerica was not destined to last.

The financial crisis has put the marriage on the rocks. Correcting the economic imbalance between the US and China - the dissolution of Chimerica - is now indispensable if equilibrium is to be restored to the world economy.

China's economic ascent was a result of a strategy of export-led growth, following the earlier examples of West Germany and Japan after World War II. But there was a key difference: China made a huge sustained effort to control the value of its currency, the renminbi, resulting in a huge accumulation of reserve dollars.

As Chinese exports soared, the authorities in Beijing consistently bought dollars to avoid appreciation of their currency, pegging it at about 8.28 renminbi to the dollar from the mid-1980s to the mid-90s, then allowing a modest 17 per cent appreciation in the three years after July 2005, only to restore the dollar peg at 6.83 when the global financial crisis intensified last year.

Intervening in the currency market served two goals for China. By keeping the renminbi from rising against the dollar, it promoted export competitiveness. Secondly, it allowed China to build up foreign currency reserves (primarily in dollars) as a cushion against the risks associated with growing financial integration, painfully illustrated by the experience of other countries in the Asian crisis of the late 1990s.

As a result, by 2000 China had currency reserves of $US165 billion. They now stand at $US2.3 trillion ($2.5 trillion), of which at least 70 per cent are dollar-denominated.

This intervention caused a growing distortion in the global cost of capital, significantly reducing long-term interest rates and helping to inflate the real estate bubble in the US, with ultimately disastrous consequences. In essence, Chimerica constituted a credit line from the People's Republic to the US that allowed Americans to save nothing and bet the house on, well, the house.

Nothing like this happened in the 1950s and 60s. At the height of post-war growth in the 60s, West Germany and Japan increased their dollar reserves roughly in line with US gross domestic product, keeping the ratio stable at about 1 per cent before letting it move slightly higher in the early 70s. By contrast, China's reserves soared from the equivalent of 1 per cent of America's gross domestic product in 2000 to 5 per cent in 2005 and 10 per cent last year. By the end of this year, that figure is expected to rise to 12 per cent.

The Chimerican era is drawing to a close. Given the bursting of the debt and housing bubbles, US household savings will have to rise, and Americans will have to kick their addiction to cheap money and easy credit.

The Chinese authorities understand heavily indebted US consumers cannot be relied on to return as buyers of Chinese goods on the scale of the period up to 2007. And they dislike their exposure to US currency via close to two trillions of dollar-denominated reserve assets. The Chinese authorities are "long" the dollar like no foreign power in history, and it makes them very nervous.

Yet there is a strong temptation for both halves of Chimerica to keep this lopsided partnership going. Despite much talk of the need to reduce global imbalances, the biggest imbalance of all persists. This year, America's trade deficit with China will be about $US200bn, the same as last year. And China has again intervened in the currency markets, buying $US300bn to keep its currency and hence its exports cheap.

US policymakers, meanwhile, seem equally willing to prolong America's addiction to cheap money as long as economic recovery seems so fragile, regardless of the effect on the dollar's exchange rate with other currencies. (When American officials insist that they favour a "strong dollar", it is usually a sure sign that they want the opposite.)

And why would Americans want to discourage the Chinese from buying yet more dollar-denominated securities? With trillion-dollar deficits as far as the eye can see, the Treasury needs all the foreign buyers it can get.

The reality, however, is that an end to Chimerica is in the American interest for at least three reasons. First, adjusting the exchange rates between the currencies would help reorient the US economy - primarily by making American exports more competitive in China, the world's fastest-growing economy.

Second, an end to Chimerica would lessen the potentially dangerous reliance of US economic policy on measures to stimulate domestic purchasing. US fiscal policy is clearly on an unsustainable path, and the Federal Reserve's near-zero interest rates and printing of dollars are artificially inflating equity prices.

Finally, renminbi revaluation would reduce the risk of potentially serious international friction over trade. The problem is that as the dollar weakens against other world currencies - notably the euro and the Japanese yen - so does the renminbi, magnifying China's already large advantage in global export markets. The burden of post-crisis adjustment thus falls disproportionately outside Chimerica.

Unless China's currency is revalued, we can expect an unco-ordinated wave of defensive moves by countries on the wrong side of Chimerica's double depreciation.

Already we are seeing the danger signs. Last month, Brazil imposed a tax on inflows of "hot money" - large, volatile flows of foreign investment that may exit an economy as quickly as they appeared - to try to slow the appreciation of its currency, the real. A number of Asian economies intervened last week to weaken their own currencies relative to the dollar. Similar currency games were a feature of the worst economic decade of the 20th century, the 1930s. Historically, as production costs and income levels in countries have risen, their currencies have adjusted against the dollar accordingly. Between 1960 and 1978, for example, the deutschmark appreciated cumulatively by almost 60 per cent against the dollar, while the Japanese yen appreciated by almost 50 per cent. The lesson is that exporters can live with substantial exchange rate revaluations so long as they are achieving major gains in productivity, as China still is.

This week, to be sure, China's central bank has suggested that it might be willing to switch from the dollar peg to some form of exchange-rate management, taking account of "international capital flows and movements in major currencies". But, like the recent Chinese comments about replacing the dollar as the premier international reserve currency, this may be no more than rhetoric.

During this week's visit in China, Mr Obama had to resist the temptation to respond to these overtures with rhetoric of his own. This is not the time for big speeches, but for subtle diplomacy. Right now, Chimerica clearly serves China better than America. Call it the 10:10 deal: the Chinese get 10 per cent growth; Americans gets 10 per cent unemployment. The deal is even worse for the rest of the world - and that includes some of the US's biggest export markets and most loyal allies. The question is: what can the US offer to make the Chinese abandon the dollar peg that has served them so well?

The authorities in Beijing must be made to see that any book losses on its reserve assets resulting from changes in the exchange rate will be a modest price to pay for the advantages it reaped from the Chimerica model: the transformation from third-world poverty to superpower status in less than 15 years. In any case, these losses would be more than compensated for by the increase in the dollar value of China's huge stock of renminbi assets.

It is also in China's interest to kick its currency-intervention habit. A heavily undervalued renminbi is the key financial distortion in the world economy today. If it persists for much longer, China risks losing the very foundation of its economic success: an open global trading regime.

And this is exactly what the US President can offer in return for a substantial currency revaluation of, say, 20 per cent to 30 per cent over the next 12 months: a clear commitment to globalisation and free trade, and an end to the nascent Chinese-American tariff war.

For as long as the People's Republic has existed, the US has been the principal upholder of a world economic order based on the free movement of goods and, more recently, capital. It has also picked up the tab for policing the oil-rich but unstable Middle East. No country has benefited more from these arrangements than China, and it should now pay for them through a stronger Chinese currency. Chimerica was always a chimera - an economic monster. Revaluing the renminbi will give this monster the peaceful death it deserves.

Rome is picking up the story:

11/20/2009 16:12
CHINA – UNITED STATES
US Congress threatens sanctions over China’s yuan

After Obama’s requests and the silence of China’s leaders, there is no sign that war over the value of the yuan is over. For some economists, Beijing’s monetary policy is helping the US contain inflation whilst making it easier for the world to pull itself out of the current crisis. For others, it is destroying the manufacturing capacity of the rest of the world whilst enslaving much of China’s population.


Rome (AsiaNews/Agencies) – A group of US senators has criticised Barack Obama for failing to get China to revalue the yuan. They plan to take steps to put a break on Chinese imports.

Republican and Democratic members of Congress sent a letter to the Commerce Department calling for an investigation into “China's currency manipulation”.

It is “a potential first step in a process that could lead to significant, US-imposed tariffs on imports from China”, said Democratic Senator Charles Schumer, who jointly wrote the letter with Republican Senator Lindsey Graham.

US economists and political leaders have accused China of undervaluing its currency in order to increase the competitiveness of its exports. In January, US Treasury Secretary Timothy Geithner accused China of manipulating its currency, only to retract later. The net result is that the US trade deficit with China ballooned to US$ 268 billion last year.

Similar charges have been made elsewhere in the world.

During Barack Obama’s visit to China, Beijing indicated that it was willing to let its currency to float but China’s Commerce Ministry shot down the idea, saying any move on that front would have to wait for better times.

Even though Obama said he raised the issue with Chinese leaders, neither President Hu Jintao nor Prime Minister Wen Jiabao publicly referred to any possible revaluation of the yuan.

Some Chinese economists have even accused the United States of manipulating the value of the dollar, by keeping interest rates close to zero.

In article published yesterday in the South China Morning Post, economist Andy Xie said that yuan’s fixed rate against the dollar spared the United States hyperinflation and is helping the international community pull out of the global crisis.

However, for economist Maurizio d’Orlando, the yuan’s low value is “abnormal, beyond any parameter or conceivable excess.” At present, the US dollar is pegged at 6.8333 yuan. However, the Chinese currency should be re-valued by 33.43 per cent according to the purchasing power parity rate. The dollar would thus be worth 5,121 yuan (see Maurizio d’Orlando, “G8, toxic securities, US and Chinese addictions,” in AsiaNews, 7 July 2009)

For d’Orlando, “China’s strategy is hegemonic, based on a quest for national grandeur in the Far East. The cost is the destruction of the manufacturing capacity of the rest of the world and the reduction of entire populations to virtual slavery” in China.

UPDATE 1-Euro zone to urge China for more flexible FX policy
Live Chat!

Friday November 20, 2009 05:54:11 PM GMT
Reuters News
EU-CHINA/ALMUNIA (UPADTE 1)


By Marcin Grajewski


BRUSSELS, Nov 19 (Reuters) - Top euro zone officials will urge China this month to move towards a more flexible exchange rate policy but it will not be easy to introduce change soon, EU Monetary Affairs Commissioner Joaquin Almunia said on Thursday.


European Central Bank President Jean-Claude Trichet, the chairman of euro zone finance ministers, Jean-Claude Juncker, and Almunia will travel to China at the end of November for talks on exchange rates.


"We will stress to the Chinese authorities the need to introduce a more flexible management of exchange rates," Almunia told reporters on the sidelines of a conference in Brussels.


The Chinese yuan is virtually pegged to the U.S. dollar, trading in a 0.5 percent band on either side of a mid-point set daily by the Chinese central bank.


"We know it is not easy to change, in a short period of time, the way the yuan is managed," he said. "We agree with the Chinese authorities about the direction of changes needed."


Just like the U.S. currency, after a sharp rise in value in the second half of 2008, the yuan has been steadily weakening against the euro since March.


Europeans believe the yuan, backed by China's huge trade surplus, should be much stronger. The Group of Seven industrialised countries, which also includes the United States, Japan and Canada, sent a similiar message in October.


"China will be a key part of the solution to our economic problems, to the reduction of global imbalances," Almunia said.


An artificially weak Chinese currency gives the Asian economy a trade advantage with the euro zone and the United States and builds up its foreign currency reserves which China then invests in U.S. bonds.


China has amassed $2.27 trillion of foreign reserves, the world's largest stockpile, and analysts think about two-thirds of this is invested in dollar-denominated assets.


This, in turn, lowers the cost of financing debt for the U.S. and helps boost the U.S. budget deficit and discourages U.S. savings, augmenting the global trade-savings imbalances.


The three euro zone officials made a similar trip to China to discuss exchange rates in late 2007 following which, in December 2007, the yuan rose sharply.


China has repeatedly said it would gradually liberalise its tightly controlled foreign exchange market, allowing the yuan to move more freely, but that reforms will be conducted at a pace which does not destabilise its economy.


The yuan was revalued by 2.1 percent to 8.11 per dollar on July 21, 2005. In the three years following the revaluation, the central bank allowed the yuan to appreciate a further 19 percent against the dollar. The yuan's traded peak since the revaluation was 6.8099, reached on Sept. 23, 2008.


Since July 2008, however, the central bank has used the mid-point to keep the yuan at a virtual peg to the dollar within a narrow 100-pip range, to protect China's economy as it confronted a slowdown due to the global financial crisis.


China's Commerce Ministry on Monday rebuffed calls for the yuan to appreciate, signalling resistance to change foreign exchange policy.


Outside pressure has been building on Beijing to let the yuan rise after more than a year of it being nearly frozen in place against the dollar, with the latest appeal voiced by the head of the International Monetary Fund on Tuesday.


But Chinese officials have swatted down speculation of any big moves soon, and the government appears likely to keep the currency on a tight rein at least until the middle of 2010 to cement the country's economic recovery. (Reporting by Marcin Grajewski, writing by Jan Strupczewski, editing by Dale Hudson; Editing by Toby Chopra)

Thursday, November 19, 2009

Why China Resists Currency Revaluation
From the Economist, "China's Currency: A Yuan-Sided Argument":

PRESIDENT BARACK OBAMA, on his first visit to China this week, urged the government to allow its currency to rise. President Hu Jintao politely chose to ignore him. In recent weeks Jean-Claude Trichet, the president of the European Central Bank, and Dominique Strauss-Kahn, the managing director of the International Monetary Fund, have also called for a stronger yuan. But China will adjust its currency only when it sees fit, not in response to foreign pressure.

China allowed the yuan to rise by 21% against the dollar in the three years to July 2008, but since then it has more or less kept the rate fixed. As a result, the yuan’s trade-weighted value has been dragged down this year by the sickly dollar, while many other currencies have soared. Since March the Brazilian real and the South Korean won have gained 42% and 36% respectively against the yuan, seriously eroding those countries’ competitiveness.

Speculation about a change in China’s currency policy increased in the week before Mr Obama’s visit, after the People’s Bank of China tweaked the usual wording in its quarterly monetary-policy report. It dropped a phrase about keeping the yuan “basically stable” and added that foreign-exchange policy would take into account “international capital flows and changes in major currencies”. But exchange-rate policy is decided by the State Council, not the central bank. And many policymakers, notably in the Ministry of Commerce, do not favour a revaluation right now.

Indeed, Chinese officials have become bolder in standing up to America. “We don’t think that it’s good for the world economic recovery that you ask others to appreciate while you depreciate your own currency…It’s also unfair,” said a spokesman for the Ministry of Commerce on November 16th. The previous day Liu Mingkang, China’s chief banking regulator, blasted America for its low interest rates and for the falling dollar, which, he suggested, might be encouraging a dollar carry trade and, in turn, global asset-price bubbles. He strangely ignored the fact that China’s own overly lax monetary policy, partly the result of its fixed exchange rate, risks fuelling bubbles in its domestic property and equity markets.

Foreigners argue that a stronger yuan would not only help reduce global imbalances, such as America’s trade deficit, but would also benefit China. It would help China regain control of its monetary policy. By pegging to the dollar, it is, in effect, importing America’s monetary policy, which is too loose for China’s fast-growing economy. A stronger yuan would also help rebalance China’s economy, making it less dependent on exports, putting future growth on a more sustainable path.

If a stronger exchange rate is in China’s own interest, why does it resist?

China's exchange-rate policy
A yuan-sided argument
Nov 19th 2009 | HONG KONG
From The Economist print edition
Why China resists foreign demands to revalue its currency
PRESIDENT BARACK OBAMA, on his first visit to China this week, urged the government to allow its currency to rise. President Hu Jintao politely chose to ignore him. In recent weeks Jean-Claude Trichet, the president of the European Central Bank, and Dominique Strauss-Kahn, the managing director of the International Monetary Fund, have also called for a stronger yuan. But China will adjust its currency only when it sees fit, not in response to foreign pressure.
China allowed the yuan to rise by 21% against the dollar in the three years to July 2008, but since then it has more or less kept the rate fixed. As a result, the yuan’s trade-weighted value has been dragged down this year by the sickly dollar, while many other currencies have soared. Since March the Brazilian real and the South Korean won have gained 42% and 36% respectively against the yuan, seriously eroding those countries’ competitiveness.
Speculation about a change in China’s currency policy increased in the week before Mr Obama’s visit, after the People’s Bank of China tweaked the usual wording in its quarterly monetary-policy report. It dropped a phrase about keeping the yuan “basically stable” and added that foreign-exchange policy would take into account “international capital flows and changes in major currencies”. But exchange-rate policy is decided by the State Council, not the central bank. And many policymakers, notably in the Ministry of Commerce, do not favour a revaluation right now.
Indeed, Chinese officials have become bolder in standing up to America. “We don’t think that it’s good for the world economic recovery that you ask others to appreciate while you depreciate your own currency…It’s also unfair,” said a spokesman for the Ministry of Commerce on November 16th. The previous day Liu Mingkang, China’s chief banking regulator, blasted America for its low interest rates and for the falling dollar, which, he suggested, might be encouraging a dollar carry trade and, in turn, global asset-price bubbles. He strangely ignored the fact that China’s own overly lax monetary policy, partly the result of its fixed exchange rate, risks fuelling bubbles in its domestic property and equity markets.
Foreigners argue that a stronger yuan would not only help reduce global imbalances, such as America’s trade deficit, but would also benefit China. It would help China regain control of its monetary policy. By pegging to the dollar, it is, in effect, importing America’s monetary policy, which is too loose for China’s fast-growing economy. A stronger yuan would also help rebalance China’s economy, making it less dependent on exports, putting future growth on a more sustainable path.
If a stronger exchange rate is in China’s own interest, why does it resist? Beijing rejects the accusation that its exchange-rate policy has given it an unfair advantage. It is true that other emerging-market currencies have risen sharply this year, but this ignores the full picture. Last year China held its currency steady against the dollar throughout the global financial crisis, while others tumbled. Since the start of 2008, the yuan has actually risen against every currency except the yen (see chart).
China also argues that it has done a lot to help global rebalancing. Thanks to its monetary and fiscal stimulus, domestic demand has contributed an remarkable 12 percentage points to GDP growth this year, while net exports subtracted almost four percentage points. Its current-account surplus has fallen by almost half, to around 6% of GDP from 11% in 2007. Chinese policymakers accept that the yuan needs to appreciate over the longer term, but say now is the wrong time, because Chinese exports are still falling, by 14% over the past 12 months.
Another reason for hesitation is that the theory that revaluing the yuan will allow Beijing to tighten its monetary policy is too simplistic. China’s experience since 2005 shows that a gradual rise encourages investors to bet on further appreciation; hot-money inflows then swell domestic liquidity. A large one-off increase might work, as it would stem expectations of a further rise. But the sort of increase required—perhaps 25%—is politically unacceptable because it would put many exporters out of business overnight.
Some Chinese economists warn that the benefits to America from yuan revaluation are much exaggerated. In particular, a stronger yuan would not significantly reduce America’s trade deficit. There is little overlap between American and Chinese production, so American goods could not simply replace Chinese imports. Instead, consumers might end up paying more for imports from either China or other producers, such as Vietnam. This would be like imposing a tax on American consumers.
These arguments help explain why China is dragging its feet. Nevertheless, in the long run, a stronger yuan would benefit China’s economy—and the world’s—by helping shift growth from investment and exports towards consumption. It would boost consumers’ purchasing power and squeeze corporate profits, which have accounted for most of the increase in China’s excessive domestic saving in recent years. China will probably allow the yuan to start rising again early next year. This will not be the result of foreign lobbying—indeed, China is more likely to change its policy if foreign policymakers shut up. But by early next year China’s exports should be growing again, its year-on-year GDP growth could be close to 10% and its inflation rate will have turned positive. The arguments in favour of revaluation will then loom much larger.