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China CEOs join Obama in supporting yuan appreciation

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China CEOs join Obama in supporting yuan appreciation
March 25, 2010 - 7:17AM

Chinese executives are joining US President Barack Obama in backing a stronger yuan, even as Premier Wen Jiabao says the currency isn't undervalued.

Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd., said appreciation would boost consumers' purchasing power. Qin Xiao, chairman of China Merchants Bank Co., said an end to the yuan's 20-month peg to the dollar would let lenders set market-based interest rates. Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group Co., said a stronger currency would cut import costs.

While the comments conflict with Wen, who said March 14 that criticizing the exchange-rate policy amounted to "protectionism," they are in line with traders who expect the government will let the yuan appreciate later this year. US lawmakers have called on Obama to use the threat of trade sanctions to force an end to a currency regime that they blame for making their nation's manufacturers uncompetitive.

"We need to emphasise the benefits of yuan gains," Zhang Yanling, vice chairman of Beijing-based Bank of China Ltd., the nation's biggest foreign-currency lender, said in a March 19 interview. "The US should also be talking about both aspects of the issue. We shouldn't politicise it or become emotional."

Contracts linked to its future value predict the currency will break its dollar link by July, gaining beyond 6.8 in three months. Twelve-month offshore forwards, which weakened to a three-month low yesterday, climbed 0.2 per cent to 6.6687 per dollar today. They reflect bets the yuan will advance 2.4 per cent in the coming year, down from 3 per cent before Wen's briefing.

Quick Gain 'Disruptive'

Hangzhou-based Wanxiang Group Co., the nation's largest auto-parts maker, can cope with a gradual advance, though a quick appreciation would be "disruptive," Chairman Lu Guanqiu said in a March 8 interview in Beijing.

China Eastern Airlines Corp., the nation's second-largest carrier, would increase profit by 280 million yuan ($US41 million) for every 1 percent annual yuan gain because of its dollar debt, President Ma Xulun said at a shareholders' meeting March 19. The Shanghai-based company may post 2009 net income of 614 million yuan, according to the median of seven analyst estimates compiled by Bloomberg.

Airlines Rally

The airline's shares climbed 17 per cent in the past month in Hong Kong, as the MSCI China Index rose 4 per cent to 62.80.

Morgan Stanley recommended on March 18 buying China Eastern along with Shanghai-based Baoshan Iron & Steel Co., the biggest publicly traded Chinese steelmaker. The New York-based bank estimated that the 5 per cent maximum appreciation in the yuan it predicts for 2010 will have an average 2 per cent positive impact on the earnings of Chinese companies, making them more attractive.

"Yuan appreciation will bring us benefits because we import several billion yuan worth of ore every year from abroad," Chen, chairman of Hunan Lengshuijiang Steel, based in central Hunan province, said in a March 12 interview in Beijing.

Chinese banking executives blame the yuan peg for disrupting money markets. China's dollar purchases to maintain the peg have driven currency reserves to $US2.4 trillion and flooded the financial system with yuan. Chinese investors held $US889 billion of Treasuries on Jan. 31, the biggest overseas holder of such debt.

Market-Driven Rates

China's benchmark deposit rate is 2.25 per cent, less than the 2.7 per cent rate of consumer-price inflation in February. The central bank can't raise interest rates without attracting more speculative capital at a time when US benchmark rates are near zero.

"If we don't reform the exchange-rate regime, how can we price interest rates based on the market?" Qin, 62, at Shenzhen-based China Merchants, the nation's fifth-largest lender by market value, told reporters on March 3 in Beijing.

Lenovo's Yang, 45, said limited appreciation in the yuan wouldn't be a "bad thing" as it would boost Chinese domestic purchasing power and encourage global trade using the currency. Lenovo acquired International Business Machines Corp.'s personal computer business in 2005.

"We may not worry too much about exporters if we can conduct more yuan-denominated trade," Yang told reporters on March 5 in Beijing. China allowed yuan settlement in some parts of the country starting July 2 last year.

Expectations that China's currency will appreciate drove such settlements to 7 billion yuan in the first two months of this year, almost twice the 3.6 billion yuan in the second half of 2009, according to Zhang, 58, at Bank of China, which has more than 800 overseas branches that can handle the trades.

"If the yuan is expected to be a strong currency, neighboring countries will prefer to hold the yuan instead of the dollar," she said. "Will this be good for the US?"

Stress Tests

Textile and furniture makers stand to lose the most from appreciation as their profit margins are as low as 3 percent, said Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, at a March 18 press briefing in Beijing. Some would "face bankruptcy," he said, after his organization conducted stress tests at 1000 companies.

Sean Callow, a strategist in Sydney at Westpac Banking Corp., said in a March 23 interview that investors should buy six-month contracts because the trade dispute may cause "a relatively short" delay to the currency appreciation needed to fight inflation.

Economic Rebalancing

Wen, 67, has kept the yuan at about 6.8 per dollar since July 2008 to protect China's exporters during the global recession, after allowing a 21 per cent advance in the previous three years.

China may report a trade deficit of more than $US8 billion in March, compared with a $US24 billion surplus in October, as imports grow faster than exports, Wen told the China Development Forum on March 22. Exports accounted for a quarter of gross domestic product last year, down from a third in 2008, government data show.

Obama, 48, said on March 11 in Washington that "a more market-orientated exchange rate will make an essential contribution" to re-balancing the global economy. Five senators proposed legislation last week that would allow the US to take action against exchange-rate "misalignments." The Treasury Department will decide next month whether to label China as manipulating its currency, a designation not invoked since 1994.

Sending a Message

"To the extent that rhetoric increases in the US you play to the hardliners in China, which makes it that much more difficult for the government to move," Susan Schwab, a former US Trade representative, said in a March 18 interview in Hong Kong. "We always have this impression that China is monolithic. There are debates going on internally."

A planned meeting of Chinese and US officials in Beijing in May will help "address disputes," Premier Wen said at this week's forum, calling on the world's executives to help avoid a "currency war." People's Bank of China Governor Zhou Xiaochuan appealed for less "noise" in the debate, saying in Cancun, Mexico the same day that policy decisions should be based on "sound economic analysis."

"On the political front, the administration has to play to the hard line and say we are not going to be swayed by US pressure," said Lee Boon Keng, Singapore-based deputy chief investment officer at Bank Julius Baer & Co., which manages about $US142 billion in assets. It's significant that executives at state enterprises are speaking in support of appreciation, he added, because "they're sending a very strong message to the markets, to the people, that look, it actually works for you."

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