Fair Currency Coalition

Bob Davis and Aaron Back, “IMF Sees Yuan as Undervalued”

IMF Sees Yuan as Undervalued, Wall Street Journal
Despite China’s decision to adopt a “flexible” exchange rate, the International Monetary Fund’s long-delayed review of the Chinese economy found that the yuan is “substantially undervalued,” according to IMF officials.

The IMF determination is bound to put pressure on Beijing to let the currency appreciate more than the 0.7% it has risen since China loosened the yuan’s peg to the dollar on June 19. The IMF determination was backed by the U.S., Germany, France, the United Kingdom, among others, say two individuals familiar with the deliberations, as the IMF’s executive board debated the China report on Monday, though none of the countries pushed China to boost its currency quickly.

In China, the central bank had been explaining to the public how a flexible exchange rate can help the economy by alleviating inflation pressures and improving the effectiveness of monetary policy.

On Monday, before the IMF’s board met, Hu Xiaolian, a respected deputy governor of the People’s Bank of China, made her third statement in less than two weeks addressing the reasons for the government’s decision last month to loosen the yuan’s de facto peg against the U.S. dollar, a change that was vocally opposed by Chinese exporters and some other interest groups.

Her comments echoed arguments made by IMF and other global institutions, but were unusual coming from a Chinese official. “This kind of openness is very rare,” said Ken Peng, an economist at Citigroup. “The tone of Hu’s statements has actually grown stronger as they have come out.”

It’s unclear whether the IMF’s determination will strengthen the hand of those in Beijing urging a revaluation, or create a backlash. One indication of the direction will be whether China will block the IMF from publishing a detailed summary of the board’s Monday deliberation over the next few weeks. The full IMF analysis would likely be published in September unless China withholds its permission.

IMF members are entitled to block publication of IMF reviews, though most now allow publication. The U.S. has been pressing Beijing to permit publication.

China hadn’t allowed the IMF to conduct an annual review of its economy since 2007 as the two sides fought over China’s policy of pegging the yuan tightly to the dollar, a policy that China put in place in 2008. The U.S. and Europe—the IMF’s largest shareholders—complained that policy gave Chinese exporters an unfair advantage. The IMF began the current review in the spring of 2010.

Eswar Prasad, a Cornell University economist and a former head of the IMF’s China desk, said a draft of the IMF staff report he had seen noted positively Beijing’s decision to let its currency float. The report also highlighted that China’s current account surplus had fallen in recent months—which could be an indication that the currency is properly valued. But the IMF forecast that the change in the surplus was only temporary, a determination it had made in April as well.

“Significant action” was needed to reduce the undervaluation, Mr. Prasad said.

Brazil largely backed the Chinese position that the reduction in China’s current account balance could be long lasting, said the country’s IMF representative, Paulo Nogueira Batista.

Chinese officials argued that “they have done what they needed to do and the rest of the world should give them room” to act, he said. Another individual familiar with the deliberations said the report’s finding hadn’t changed significantly from the draft.

In Ms. Hu’s latest statement on the yuan, which was posted on the central bank’s website, she focused on the dangers of inflation. That is familiar territory for any central banker, but Ms. Hu turned up the rhetorical heat by quoting legendary free-market economist Milton Friedman’s statement that inflation is “a dangerous and sometimes fatal disease.”

“Looking at China’s situation, those who suffer greatest from inflation are the low-income masses, especially China’s over 40 million poor urban residents and nearly 100 million poor migrant workers, a situation which if improperly handled will affect social equality and stability,” she said.

Such comments probably indicate that the central bank would like to allow the yuan to appreciate further if it perceives inflationary risks, economists said. But major decisions on currency and monetary policy require approval from China’s top political leadership.

At the moment, most economists generally see China’s current inflation rate as manageable and don’t see a need for a major policy shift to stop price increases. China’s consumer price index rose 2.9% from a year earlier in June, down from May’s 3.1% rise.

Ms. Hu said that although the consumer price index has “basically stabilized at a low level” in recent years, other measures of price levels, such as the producer price index, real estate prices and other asset prices, have all risen by larger margins.

She said that China faces inflationary pressures from the capital flowing into the country from its massive trade surpluses with the outside world. To keep the currency from rising sharply, the central bank has been forced to buy up the incoming foreign currency with yuan, thus increasing domestic money supply, she said.

Beijing Considers Plan To Move Its Currency Further From Dollar

Beijing Considers Plan To Move Its Currency Further From Dollar, Wall Street Journal
July 23, 2010

BEIJING—China will consider publishing an effective exchange rate for the yuan against a range of other currencies in an effort to de-emphasize its value against the dollar, in a further indication of how Beijing plans to manage the yuan since effectively decoupling it from the U.S. currency.

People’s Bank of China Vice Gov. Hu Xiaolian said in comments published on the central bank’s website Thursday that China will consider gradually moving toward using the effective exchange rate as a reference point for the yuan. The effective exchange rate is an estimation of the value of a currency relative to a group of other currencies, weighted based on the amount of trade between the countries.

If China were to adjust the value of the yuan based on its effective exchange rate, it could mean less focus on the bilateral yuan-dollar rate. However, the comments didn’t name currencies or offer additional details about how such a basket would work.

The statement marks the second time Ms. Hu has commented on the yuan’s exchange rate since China effectively ended the yuan’s peg to the dollar on June 19. The PBOC hinted then that it was moving to a new currency regime that would focus more on guiding the yuan against a basket of currencies.

The peg helped keep the yuan’s value stable in comparison to the dollar, reducing currency volatility as Beijing looked to foster the country’s torrid growth rate. But U.S. lawmakers, leaders from competing countries and others argued that the peg gave China an unfair advantage by keeping prices of its exports low.

Economists cautioned against reading too much into the statement, saying ambiguities remain in China’s stance, even if it is becoming clearer that a basket-based system is the long term goal for exchange rate policy. China’s central bank isn’t independent, and decisions on monetary policy and the exchange rate require the approval of the country’s top political leadership.

“The PBOC has always had these kinds of views, but they don’t have the power to make these kinds of decisions,” said Goldman Sachs economist Yu Song.

Also Thursday, Chinese Premier Wen Jiabao said policy stability will be the basis of the government’s economic work in the second half and that Beijing aims to maintain steady and fast economic growth in the long run. Mr. Wen’s comments suggest the government is placing slightly more emphasis on maintaining fast economic growth than it did in the first half, after China’s gross domestic product growth slowed to 10.3% in the second quarter from 11.9% in the previous quarter as stimulus spending continued to wind down gradually and controls on bank lending and property speculation began to be felt in the broader economy.

A strict linking of the yuan to a basket of currencies is unlikely in the near term, analysts say, as it would mean the yuan could fall against the dollar when the U.S. greenback is rising against other currencies, which could enrage parties in the U.S. calling for yuan appreciation.

Standard Chartered economist Stephen Green said the statement appeared to be part of an “education campaign” on the importance of the effective exchange rate. “But they haven’t said what’s in the basket, and they aren’t claiming to be linking to a basket, they are just telling us that they are referencing one,” he said.

China said it would reference a basket of currencies when it first unshackled the yuan from the dollar in July 2005. But it went on to allow a steady appreciation against the dollar for around three years, with no apparent reference to a basket. China resumed pegging the yuan to the dollar in 2008, in the midst of the global financial crisis.

In her statement Thursday, Ms. Hu said China’s intention has been to reference a basket since its initial exchange rate reform in 2005, “but the idea of only focusing on the yuan-dollar exchange rate is hard to change in the near term,” due to long-established habits, accounting practices, and other issues.

Ms. Hu said China may attempt to periodically announce estimates of the yuan’s nominal effective exchange rate, “to guide the public to change the habit of mainly focusing on the bilateral exchange rate with the dollar.”

The Bank of International Settlements publishes monthly estimates of the effective exchange rates of various countries. A key factor in determining the rates is deciding what weighting to give individual currencies, which BIS sets according to levels of trade in manufactured goods.

Ms. Hu said China’s weighting calculation will be mainly based on current account payments, but also take into account capital account payments and the currency composition of cross-border capital flows, among other factors.

Ms. Hu also said other factors will be considered in determining the yuan’s exchange rate, including jobs and the potential for large-scale company closures. The exchange rate will be based on economic conditions and the international balance of payments to avoid fluctuations in international and domestic markets, and speculation in financial markets, she said.

Any adjustment of the exchange rate should take into account the global economic situation, Ms. Hu said. Big trade surpluses posted after the exchange rate is adjusted would show that companies can tolerate the exchange rate change, but if there is a rapid decline, it would mean companies need to increase their capability of adapting to changes in the yuan’s exchange rate, she said.

—Aaron Back, Liu Li and Victoria Ruan

“Early View on China’s Currency Overhaul: Little Change,” Wall Street Journal

Early View on China’s Currency Overhaul: Little Change, Wall Street Journal
July 16, 2010
Aaron Back, Andrew Batson, and Bob Davis

A month after China announced it would ease its currency’s de facto peg to the dollar, the yuan has gained just 0.7% against the dollar, and the stated policy shift has done little to defuse political anger at China in the U.S.

Four weeks isn’t enough time to judge the full impact of China’s intent, but, so far, this doesn’t have the hallmarks of a major shift to a more-flexible currency. More than half the appreciation of the yuan thus far came on the first trading day after the announcement. In the past two weeks, movement has largely halted.

But Americans aren’t waiting. The currency move thus far is “woeful,” said AFL-CIO President Richard Trumka, who says the yuan is undervalued by 40%. “Even if it increased 0.7% a month for a year, it would be woeful,” he said.

Frank Vargo, a National Association of Manufacturers’ vice president, said, that without a greater appreciation, “there will be a fair amount of pressure to do something” on Capitol Hill to penalize China.

But any substantive move against China in Congress is unlikely until after the November elections because lawmakers are focusing on other priorities, including deficits, taxes and unemployment, said Mr. Trumka.

Sen. Charles Schumer, a New York Democrat, whose legislation would make it easier to take punitive action against Beijing, said in a statement, “There hasn’t been an opportunity yet in the last month to bring our proposal to the Senate floor…We continue to push our legislation and are looking for the first available opportunity to offer it.”

On Thursday, a deputy governor of the People’s Bank of China reaffirmed the central bank’s commitment to currency flexibility and pointed out its benefits. The comments by Hu Xiaolian are the first lengthy elaboration of PBOC views on currency policy since the June 19 announcement. The remarks, published on the PBOC web site in both English and Chinese, are noteworthy because they echo much of the criticism of China’s tightly controlled exchange-rate regime leveled by the U.S. government and International Monetary Fund.

Ms. Hu said a fixed exchange rate would be dangerous to the nation’s economy and that rigid exchange rates had contributed to financial crises in the past, including in Mexico in 1994, Argentina in 2001 and several Asian countries in 1997. “Thus, it is necessary for large countries to have (a) flexible exchange-rate policy,” she said.

The People’s Bank of China has been the leading voice for currency reform within the Chinese government, arguing against the Commerce Ministry and others who said letting the exchange rate rise would hurt Chinese exporters by making their goods more expensive in dollar terms. The central bank’s argument won out with China’s top leaders, who treasure stability but want to strengthen domestic consumption and reduce China’s reliance on exports.

Conditions that preceded both unpeggings in 2005 and 2010 are similar: in China, the economy is surging, and in the U.S., political impatience with Beijing’s currency policy is gaining steam.

When China unpegged the yuan from the dollar in July 2005, the currency gained about 2% during the first month of trading—and nearly all on the first day. In the first year, the yuan rose just 3.5%, and over a three-year period, gained a total of about 21%. Beijing re-established the peg in mid-2008 as the global recession took hold. This time around, at the current rate of appreciation, the yuan would rise more than 8% over a year—though there is no guarantee the Chinese plan a steady increase.

The recent change in policy was announced shortly before leaders of the Group of 20 leading and developing nations met in Toronto, taking China’s exchange rate off the agenda and making it easier for the U.S. Treasury last week to, again, avoid declaring China a currency manipulator in a congressionally mandated report.

Shortly after Beijing announced its move, President Barack Obama suggested that the U.S. would judge China’s progress “over the course of a year,” but later, telling reporters about a conversation he had had with Chinese President Hu Jintao, Mr. Obama truncated the time frame to “the months ahead.”

The small appreciation thus far has the Obama administration and Congress looking for levers to keep the pressure on China. Treasury Secretary Timothy Geithner has said “what matters is how far and how fast the renminbi appreciates.”

The next lever may be IMF review of China’s economy, likely to be completed in September. China had blocked the IMF from undertaking a review —generally done annually—since 2007 as the two sides squabbled over China’s currency policy. IMF officials regularly describe China’s currency as “substantially undervalued.” The U.S. is pressing China to permit the publication of the IMF review., which could focus international attention again on China’s currency policy.

A widening of the U.S. trade deficit with China amid widespread concern about unemployment is likely to prompt congressional rhetoric—if not action—to act against China. In May, the U.S. trade deficit with China expanded to $22.3 billion, the widest since October. “I think the knives will come out fairly soon,” predicted Cornell University economist Eswar Prasad, a China specialist.

China took pains to signal that movement of the currency would be gradual, and that the yuan could fall as well as rise. Such a strategy is aimed at fending off speculative flows of capital betting on currency appreciation, one of the chief drawbacks of a controlled exchange-rate regime. The fact that the yuan isn’t predictably and consistently rising against the dollar thus achieves one of China’s main economic goals, even though it worsens political strains with critics abroad.

Chinese officials point out that the yuan has appreciated substantially against the sagging euro this year, even though it has moved little against dollar.
—Liu Li contributed to this article.

http://online.wsj.com/article/SB10001424052748703722804575368970567812464.html

James Bacchus, “A Trade War With Zero Currency”

A Trade War With Zero Currency, Wall Street Journal
July 12, 2010
James Bacchus

In the past, U.S. congressional threats to slap tariffs on Chinese imports in retaliation for the perceived trade effects of Chinese currency practices were only threats. Now, for the first time, there is a real chance these threats could lead to action.

That’s because the debate in America is changing. Mainstream politicians, the media and even businesspeople are starting to call for action against Beijing. Earlier this month, Andy Grove, former chairman and chief executive of Intel, said the U.S. should “levy an extra tax on the product of offshored labor. If the result is a trade war, treat it like other trade wars—fight to win.” He is far from alone in urging such action.

Thus, there’s growing support in Washington for punitive legislation sponsored by Senator Charles Schumer. The New York Democrat wants to change U.S. law to permit additional tariffs to be applied to Chinese imports to offset the “subsidy” provided by the yuan’s alleged undervaluation. The level of those tariffs could exceed many billions of dollars annually.

Evidently, Senator Schumer has been persuaded that this action would somehow be consistent with U.S. obligations to China under the international rules on which both countries have agreed as members of the World Trade Organization. It is not at all clear that it would be.

Chinese currency practices benefit Chinese producers generally. To fit the definition of a “subsidy” under WTO rules, a governmental action must take the form of a “financial contribution” that, unless conditioned on exports or on the use of domestic over imported goods, must also be “specific” to “certain enterprises.” Successfully defending the notion that Chinese currency practices meet this definition would be difficult, to say the least, in WTO dispute settlement, where there is no precedent for such an assertion or such a ruling.

But given that America is in the middle of a “jobless” recovery, where five unemployed Americans are still seeking work for every one job available, such a move could prove popular. Few members of Congress seeking re-election in November are likely to be dissuaded from voting for such legislation because it may be inconsistent with international law. They would only see the immediate political benefit.

Nor are they likely to be deterred by the possibility of losing a WTO case to China a year or two from now. By that point, they would already be re-elected. Never mind the extensive and expensive trade sanctions that could later be applied lawfully by China if the U.S. lost at the WTO and refused to comply with the verdict.

To his credit, President Barack Obama has refrained from indulging in inflammatory rhetoric or taking precipitous action on the currency issue. Last week, Treasury Secretary Timothy Geithner declined to name China a currency manipulator under U.S. law. Clearly, the Obama administration continues to prefer quiet diplomacy to confrontation as the best course for resolving the currency dispute.

The Chinese government no doubt wants to defuse the situation, too. On the eve of last month’s Group of 20 meeting, Beijing announced it would drop the yuan’s peg to the dollar and let the value of its currency rise. This cooled the heat on China at the summit in Toronto, but it unfortunately didn’t lower the rising political temperature in Washington.

That’s partly because China simultaneously assured its own exporters that the value of the yuan will rise only gradually. Since the announcement, the yuan-dollar exchange rate has hardly budged. Mr. Geithner recently noted he would track “how far and how fast” the value of the yuan rises.

Despite his best intentions, Mr. Obama may not have the votes in Congress to stop the Schumer bill. Many Americans believe the yuan’s weakness makes Chinese exports to the U.S. cheaper and U.S. exports to China more expensive, robbing America of millions of jobs and contributing to America’s large trade deficit with China. It would be hard for the president to veto such a popular piece of legislation in the midst of an election campaign when his party’s continuing control of Congress is in dire jeopardy.

Both sides must act to calm these tensions before the world’s most important trade partners become embroiled in a mutually self-defeating trade conflict. The Schumer bill, if enacted, would thwart ongoing efforts in both countries to sustain the fragile global economic recovery and create more jobs and more prosperity in America and China alike. Whatever the pressures politically, America’s best interest economically is in keeping America open to growing and mutually beneficial two-way trade with China.

For its part, China can stop relying on cheap exports for growth, and start relying on spending by Chinese consumers in its rapidly developing economy. China could also reconsider “indigenous innovation” and other short-sighted, protectionist policies that make U.S. and other trade partners and investors fear that China is retreating from liberalization. Above all, the farther and faster the yuan rises against the dollar, the sooner and more significant the easing of trade tensions.

These actions would do much to help President Obama and others in the U.S. who are trying hard to stop the tariff-rattling and bring the two countries back from the brink of a destructive trade war. It’s in everyone’s interests that they succeed.

Mr. Bacchus is a former chairman of the World Trade Organization’s Appellate Body, congressman and U.S. trade negotiator. He is currently a partner at Greenberg Traurig in Washington.

Alan Beattie and James Politi, “US welcomes loosening of renminbi peg”

US welcomes loosening of renminbi peg, Financial Times

By Alan Beattie and James Politi in Washington

Published: July 9 2010 02:39 | Last updated: July 9 2010 02:39

The US declined to name China as a currency manipulator in a politically sensitive report on Thursday, citing Beijing’s loosening of the renminbi peg in June as “a significant development”.

The report had been delayed from April as part of a process of quiet diplomacy to encourage China to allow some flexibility in the exchange rate.

The renminbi, which was allowed to float upwards by 21 per cent between July 2005 and July 2008, was then repegged in response to the financial crisis. Beijing said on June 19 it would permit some movement but did not commit itself to a target.

Tim Geithner, Treasury secretary, said: “What matters is how far and how fast the renminbi appreciates.”

Mr Geithner, who has been criticised by some lawmakers for failing to push Beijing hard enough, said: “We will closely and regularly monitor the appreciation of the renminbi … in close consultation with Congress.”

Key lawmakers said that China would have to allow faster appreciation of the renminbi then previously. Sander Levin, chairman of the House ways and means committee, said: “This is a first step, but clearly only that.”

Members of Congress have threatened legislation to restrict Chinese imports on the grounds that the currency is undervalued and preventing US companies from competing.

“We must monitor China’s progress but also give serious consideration to all options in the event, as was the case in 2005-08, that China fails to take the additional necessary steps,” Mr Levin said.

Naming a government a manipulator, which involves a complex set of criteria, carries no sanctions except a commitment to start negotiations, which in the case of the US and China have been under way for years.

Meanwhile, the International Monetary Fund said on Thursday the US economy had rebounded faster than expected but faced the threat of contagion from sovereign debt problems in Europe.

In an advance summary of its annual health check of the US economy, the IMF said: “While still modest by historical standards, the recovery has proved stronger than we had earlier expected, owing much to the authorities’ strong and effective macro-economic response.”

The release of the report was accompanied by good news on the economy, which contrasts with a run of recent disappointing data. The number of Americans filing for jobless claims last week fell more than expected, offering some measure of comfort that the recovery in the labour market is advancing, albeit slowly.

But the IMF warned that, along with risks of renewed weakness in the US housing market, international events of recent months had introduced risks to the recovery.

“Exporters Optimistic Over Move on Currency,” New York Times

Exporters Optimistic Over Move on Currency, New York Times
By Steven Greenhouse and Stephanie Clifford
Published: June 21, 2010

Embracing China’s decision to let its currency move more freely, American businesses said on Monday that the move would make it easier to compete against Chinese companies and would help reduce the United States trade deficit.

They cautioned, though, that the rise in the currency, the renminbi, is expected to be gradual, even if many American economists say it is 20 to 40 percent undervalued.

SGI, a California company that makes servers and data storage equipment, looks forward to extra business.

“It’s a real opportunity for SGI and other American companies to expand sales to China,” said Mark Barrenechea, the chief executive. “Although this will increase some costs for American businesses that source in China, it also means that Chinese businesses can more readily afford American exports.”

Trade experts said the winners would be American companies like General Electric and Caterpillar that export to China, while companies like Wal-Mart and Target that rely on China as a low-cost export platform may be squeezed by rising costs.

In fact, costs have already been rising this year because of demands for higher wages among Chinese workers, who are balking at the coastal jobs once coveted as a way out of rural poverty.

Even though Caterpillar has tractor-making factories in China to serve the local market, the company was quick to praise the country’s decision, struck just days ahead of a crucial Group of 20 meeting of nations. That is because along with what it produces there, Caterpillar sells China some of its most sophisticated, and therefore expensive, American-made equipment, including giant bulldozers, large mining trucks and gas turbines.

“Presumably, a stronger currency will increase their buying power, and if their economy remains strong, that will inevitably lead to more exports,” said Jim Dugan, a Caterpillar spokesman.

As China’s goods become more expensive, goods produced in the West will become relatively more attractive, not just in China but around the world.

Fred P. Hochberg, chairman of the Export-Import Bank of the United States, said it was hard to predict how much China’s currency increase could bolster American exports. “It depends on how they implement it, what rate of speed and how much it is really market-driven,” he said.

American companies and global companies that count on China to produce goods at a low cost, however, may be hurt by the currency’s rise just as they have been suffering from rising labor costs. John Frisbie, president of the United States-China Business Council, cited companies with low-end products, like apparel, shoes and toys, as among those most affected.

Wages have risen recently in China to help workers keep up with inflation and in response to labor unrest, most notably strikes at several Honda plants and 11 worker suicides at Foxconn Technology’s mammoth electronics factory in Shenzhen.

Mitch Free, chairman of MFG.com, a company based in Atlanta that helps secure manufacturing for Black & Decker, Whirlpool and Motorola, said Chinese manufacturing prices had risen by 8 percent in the last year, largely because of labor costs. He expects the trend to continue.

“They’re proactively giving some wage increases,” Mr. Free said. “We’re seeing people sending messages to the buyers, through the system, saying that they’re revising a price or can only hold a price for a short time because they’re anticipating wage increases.”

How much American exports increase depends in part on how much China allows its currency to rise. C. Fred Bergsten, director of the Peterson Institute for International Economics, predicted that if the renminbi rose by 20 percent over the next two or three years, and if adjacent countries like Taiwan and Malaysia similarly let their currencies rise, the United States would lop $100 billion to $150 billion a year from its current account deficit and create up to one million American jobs.

“Most of that change would be in exports, not just exports to China, but to Bangladesh, Vietnam and even Mexico,” Mr. Bergsten said.

Mr. Frisbie was more skeptical about the impact on the trade deficit. Neither a stronger renminbi nor higher wages would have much effect on major companies like G.E. or Boeing that have made large investments in China to sell to local consumers, he said.

For companies that make products in China for sale elsewhere, however, there will be an incentive to reconsider where their factories are.

“They’re the ones who are strategizing to consider other locations,” Mr. Frisbie said. “They’re the companies that will be impacted most. They’re looking at other places with low labor costs, like Vietnam.”

Other Asian countries could well let their currencies rise along with the renminbi, reducing the potential benefit of transferring operations out of China.

Still, some companies may decide to continue diversifying their suppliers, said Hana Ben-Shabat, who oversees A. T. Kearney’s global-retail index.

“Companies will spread their bets among different countries instead of being so attached to getting a large proportion of their goods out of China,” she said.

She said she did not expect a wave of moves to lower-wage countries because labor costs make up only 15 to 20 percent of apparel costs. “Cost of labor in Bangladesh is way lower than China,” she said, but given other costs like shipping, “the same garment could cost much more out of Bangladesh than in China.”

At one big company, Li & Fung, which does work for Wal-Mart and Liz Claiborne, among others, the president, Bruce Rockowitz, said China was still attractive. “This is not the end of China, but it’s the end of lower prices,” he said.

Clyde Prestowitz, president of the American Strategy Institute and author of “The Betrayal of American Prosperity,” said he expected no rush out of China by American companies.

“In fact, I see important guys going in, like Intel and Applied Materials,” both semiconductor manufacturers, he said. “Foreign companies are obviously concerned, but I haven’t seen anybody except Google talk seriously about getting out. It’s a big market that’s going to get bigger.”

David Barboza contributed reporting.

Yuan Rises to New High on Dollar, Wall Street Journal

Yuan Rises to New High on Dollar
The Chinese Currency’s Move—the Strongest Since Regular Trading—Backs Central Bank’s Promise of More Flexibility

By Andrew Batson, Shen Hong and Joy C. Shaw

BEIJING—The Chinese yuan rose to a new high against the U.S. dollar on Monday, taking a first step toward the greater flexibility the Chinese central bank promised when it eased the currency’s peg over the weekend.

The yuan closed at 6.7976 to the U.S. dollar in over-the-counter trading Monday, up 0.4% from Friday’s close of 6.8262. It was the yuan’s strongest level against the U.S. dollar since the currency has been regularly traded. The previous closing high came in July 2008, just before the central bank guided the currency to around 6.83 to the dollar and kept it there for the next two years to help stabilize its economy amid the global financial crisis.

The central bank had surprised markets Monday morning by keeping the yuan’s central parity rate, an official reference for daily trading, unchanged from Friday’s level of 6.8275 to the dollar. That jolted traders who had interpreted the central bank’s weekend announcement as indicating the Chinese currency would resume gradual appreciation against the dollar.

Analysts and Chinese state media also warned against expectations of a rapid or predictable rise for the yuan. But the currency ended up, reflecting strong demand for the currency that underlies near-universal expectations it needs to rise. The result could help bolster the credibility of China’s pledge to allow market forces a greater role in setting the yuan’s value.

“This is a great way to show a more market-determined exchange rate,” said Richard Yetsenga, a currency strategist for HSBC in Hong Kong.

The yuan’s gains—though extremely small by the standards of almost any other market – helped boost other Asian currencies against the dollar, and sent stock prices up around the world. Benchmark stock indexes in Hong Kong, Tokyo, Seoul and Mumbai rose by between 1.6% and 3.1%. Share prices in Europe also rose.

China’s benchmark Shanghai Composite Index closed up 2.9% as investors bid up stocks of Chinese airlines and metals firms, whose costs for imported fuel and iron ore would be lower with a stronger currency. Yields on Chinese government bonds also fell as investors bet that a stronger yuan will reduce the need for an interest rate hike.

Trading in the Chinese currency was closely watched Monday as investors and policy makers worldwide tried to gauge the significance of the shift in China’s currency policy. How much China lets the currency move will help determine to what extent it can defuse tensions with its trading partners and help shift the balance of its own economy toward consumer spending.

In the past, the central bank has generally used the central parity rate to manage daily trading in the yuan. Officially, the rate is based on market forces, but in reality is up to the central bank’s discretion, and is taken as a signal of policy intentions. But with its move on Monday the central bank sent an ambiguous message, and then let the market take its own direction. Market participants said it was significant that the central bank allowed the yuan to strengthen in spot trading, where it often intervenes heavily.

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Alan Beattie and Geoff Dyer, “Sceptics await more policy shifts in China”

Sceptics await more policy shifts in China

By Alan Beattie and Geoff Dyer

Published: June 21 2010 23:11 | Last updated: June 21 2010 23:11

For a move that had been so long lobbied for and agonised over, China’s announcement at the weekend that it would allow some flexibility back into the value of its currency was greeted by economists with grudging optimism rather than yelps of glee.

Few think the move will have a dramatic impact on the world economy – specifically on the huge global imbalances seen before the financial crisis, which are threatening to reappear.

Partly, they say, this is because of its limited size. The renminbi offshore forwards market on Monday was predicting an appreciation of just 2.3 per cent by the end of the year. At that rate, very roughly speaking and holding other things equal, it would take China more than a decade to eliminate the currency’s undervaluation, estimated to be in the range of 25-40 per.

But the caution is partly because most economists regard an exchange rate move as a helpful but not sufficient – and perhaps not strictly necessary – part of shifting consumer demand from the US to Asia.

The previous episode of renminbi flexibility, from 2005-2008, was accompanied by a soaring Chinese current account surplus. A consumption boom in the US and companies moving production to China more than offset the moderate loss in competitiveness.

For this to be truly good news, they say, it must be part of a multi-pronged policy offensive to reorient the economy away from export-led growth and towards domestic consumption.

In fully liberal market economies, holding down the exchange rate tends to deliver only temporary gains in competitiveness before the economy overheats and rising wage and price inflation push up the real exchange rate.

But Yiping Huang, economics professor at the China Centre for Economic Research, Peking University, argues that heavily regulated and directed capital markets, subsidised energy for industry and discrimination against migrant workers all hold down costs and wages, preventing the normal process of inflation eroding China’s competitiveness. They, too, need reform.

“Addressing this problem will require a comprehensive policy package,” he wrote in a recent paper for the Vox-EU policy website. “An exclusive focus on the value of the bilateral exchange rate could be counter-productive.”

China’s defenders say this is happening. Ardo Hansson, World Bank’s lead economist for China, says: “There is a whole bucket of policies that are appropriate for rebalancing, including pensions, education, healthcare, access to finance, services reform, land reform and urbanisation. In each of these areas, things are generally moving in the right direction.”

The World Bank predicts China’s current account surplus, 11 per cent of gross domestic product in 2008, will fall to 4.7 per cent of GDP this year and next.

China’s exports have recovered strongly – in the first five months of 2010 they were 10 per cent above the level in the same period in 2008, before the financial crisis. Given that global imports are still below pre-crisis levels, that indicates Chinese exporters have continued to gain market share. But the trade surplus has declined due to surging import volumes and deteriorating terms of trade.

Government-led infrastructure has been responsible for some imports, but some observers believe domestic consumer demand is playing a role. “There are many things happening in China which are much faster than our friends outside China realise, including structural change,” says Li Daokui, a Tsinghua professor and member of the central bank’s monetary policy committee. “Private consumption is growing very fast, driving up domestic demand.”

There are other countries in the world apart from the US and China. Arvind Subramanian at the Peterson Institute in Washington says one set of beneficiaries will be emerging markets in east Asia and Latin America. Many have held down their currencies to prevent a loss of competitiveness to China, and have suffered rapid and destabilising capital inflows.

“All across Asia, countries have had to deal with the real problem of overheating,” Mr Subramanian says. “At the margin, this [revaluation] will help them cope better.”

But as for China’s critics, particularly in the US, they will need to see a much faster move in the renminbi, or a more effective set of rebalancing policies, before they are convinced that this change is anything but a small gesture.

Geoff Dyer, “Beijing allows renminbi to fall in value”

Beijing allows renminbi to fall in value, Financial Times

By Geoff Dyer in Beijing

Published: June 22 2010 04:28 | Last updated: June 22 2010 16:09

China let the renminbi drop slightly in value against the dollar on Tuesday in a move that analysts said was designed to deter speculators benefiting from a stronger Chinese currency.

The central bank initially set the reference point for the day’s trading 0.43 per cent above Monday’s level, to the highest level in five years, which appeared to be a signal that it was comfortable to see further modest appreciation in the currency.

However, although the renminbi initially rose against the dollar, by the end of trading it had fallen 0.23 per cent to Rmb6.8136. Traders said state-owned banks had been in the market buying dollars, which they saw as a sign that the authorities were trying to control tightly the value of the renminbi and limit expectations of future gains. On Monday the currency rose 0.42 per cent against the dollar.

Movements in the Chinese currency have been under intense scrutiny this week after the central bank announced on Saturday that it would introduce a more flexible exchange rate regime. This was widely interpreted to mean a return to gradual appreciation against the US dollar.

The fact that the renminbi weakened against the dollar in the second day of trading under the new policy was likely to embolden those sceptics, especially in the US Congress, who viewed the weekend announcement as a political ploy to disarm criticism of China’s exchange rate policy at a time when there was little real support in Beijing for a stronger currency.

However, traders and economists in China said the trading movements reflected government concern to try to avoid a rapid inflow of speculative capital. By signalling that the currency was now likely to get stronger, officials feared that they could be establishing a “one-way bet” for investors.

“The renminbi went down today because the central bank wants to have more flexibility and more two-way movement in the exchange rate,” said Lu Zhengwei, an economist at Industrial Bank in Shanghai.

Chinese officials have been talking since the weekend about introducing more volatility into daily trading and have said the authorities would use a basket of currencies of China’s main trading partners to guide the renminbi. The implication of using the basket, officials said, was that the renminbi could potentially depreciate against the dollar if the euro were to weaken.

However, some analysts doubted that the authorities would let the currency depreciate substantially against the dollar for fear of provoking a protectionist backlash in the US.

“We still may see moves in either direction from day to day but we think the trend in the weeks and months ahead will be for the renminbi to make limited but meaningful gains against the dollar,” said Brian Jackson, a strategist with Royal Bank of Canada in Hong Kong.

Analysts believed that a large part of the timing of China’s announcement was this weekend’s summit in Toronto of the Group of 20 leading economies, where the renminbi had been shaping up to be one of the main subjects.

Qin Gang, a spokesman for the Chinese foreign ministry, urged other G20 governments not to “engage in mutual accusations and pressure” at the summit.

Although the decision has been criticized by some Chinese citizens as giving into US pressure, there has been no public criticism from other parts of the government. Yao Jian, a spokesman for the Chinese Commerce Ministry, which had campaigned openly against a stronger currency, said in the long-run the new policy would help Chinese exporters improve their competitiveness.

Spokesperson of the People´s Bank of China Answers Questions on Further Reforming the RMB Exchange Rate Regime

Spokesperson of the People´s Bank of China Answers Questions on Further Reforming the RMB Exchange Rate Regime

In view of the economic and financial development in China and abroad, particularly China´s Balance of Payments (BOP) situation, the People´s Bank of China (PBC) has decided to further reform the RMB exchange rate regime and increase the RMB exchange rate flexibility. The following is the PBC spokesperson´s interview with the press.

Q1: What are the general principles of the exchange rate regime reform? A: In July 2005, China launched the reform of the RMB exchange rate regime and moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The managed floating regime was established in line with the spirit of the Third Plenary Meeting of the Fourteenth CPC Congress and the Third Plenary Meeting of the Sixteenth CPC Congress. It has proved to be a right decision made in accordance with China´s domestic situation and development strategy. Deepening reform and further opening-up, especially the new development and open-up pattern after the China´s WTO accession, make this regime a logical choice, which has become an important part of China´s socialist market economy system following the scientific approach to development. The managed floating exchange rate regime is a well established policy in China. We are following these guidelines in further reforming the exchange rate regime this time.

Q2: What is your view on the developments since the RMB exchange rate regime reform in 2005? A: The reform launched in 2005 has been a success. Starting from 2005, the RMB exchange rate regime reform, in a proactive, gradual and controllable process and as part of China´s independent policy initiatives, has been progressing in an orderly manner. Overall, it has played a positive and supportive role in China´s economic development through facilitating macroeconomic management in a changing domestic and international environment. It has produced a number of anticipated results. First, it has encouraged the corporate sector to adopt new technology, promote innovation, and enhance core competitiveness, helping China´s exports maintain an overall competitiveness. Second, a floating exchange rate regime has become a driving force in industrial upgrading and further opening-up. This helps to improve the export structure and transform the trade pattern, and drives economic growth to become more comprehensive, balanced and sustainable. Third, the export sector now has a growing awareness to adapt to exchange rate floating, which has helped them to develop a stronger ability to adapt to exchange rate movements and manage risks, and in turn contributed to the foreign exchange market development itself. Fourth, the exchange rate regime reform has demonstrated to the international community China´s efforts to promote a balanced global economy.

Q3: What are China´s exchange rate policy considerations during the global financial crisis in 2008? A: As a result of the global financial crisis in 2008, the global economy, including the Chinese economy, has faced multiple difficulties and uncertainties.  To respond to the crisis and in line with China´s economic interests, the floating range of RMB exchange rate was narrowed. The RMB exchange rate remained basically stable in the worst of the crisis, while a number of other major sovereign currencies depreciated against the US dollar. The RMB exchange rate policy helped China to uphold external demand and mitigate the shocks of the financial crisis. The renewed economic strength in China also contributed greatly to the Asian and global recovery. The experiences in the past two years have shown that it is a right choice.

Q4: In furthering the RMB exchange rate regime reform this time, what are the key aspects? A: Following upon the reform in 2005, the reform this time does not involve a one-off exchange rate revaluation. The key remains the same in that market supply and demand will continue to play the fundamental role for exchange rate determination with reference to a basket of currencies. The RMB exchange rate floating bands will also remain the same as previously announced in the inter-bank foreign exchange market. The objective is to stabilize the RMB exchange rate basically around an adaptive and equilibrium level, and in the meantime, improve China´s BOP situation, and achieve economic and financial stability.

Q5: Will China benefit from further reforming the RMB exchange rate regime? A: The basic objective of further reforming the RMB exchange rate is to improve the managed floating regime for the RMB exchange rate. The decision was made in view of China´s domestic conditions and its own development strategy, following the mandates of the socialist market economic reform and development in the scientific approach. All suits in China´s long-term and fundamental interests.  First, it facilitates a comprehensive, balanced and sustainable development that requires structural and sector reforms. A floating exchange rate is more responsive to changes of relative prices of domestic and external sectors, and thus helps draw resources to sectors such as service industry driven by domestic demand. It promotes industry upgrading, improve growth pattern, reduce trade imbalances and make the growth less export- relied. Second, it helps contain inflation and asset bubbles, and enable macroeconomic management to be more proactive, effective, and controllable. Third, it helps nurture strategic opportunities for China´s development. China has benefited from globalization of the world economy. Further reforming the exchange rate regime will provide a favorable environment for international trade and investment and more strategic opportunities for long-term cooperation between China and other countries for mutual interest and benefits.

Q6: How to minimize the potential negative impacts of the RMB exchange rate regime reform? A: While furthering the exchange rate regime reform provides a great deal of potential for future benefits, efforts would also be needed to minimize possible negative impacts. First, it is important to avoid any sharp and massive fluctuations of the RMB exchange rate.  As China´s BOP is now moving closer to a more balanced position, prices of labor, raw materials, land and other capital goods have become higher, which raises the cost of China’s export. The basis for a large-scale RMB appreciation does not exist as the RMB exchange rate is moving closer to its equilibrium level. Second, in the self-initiated process, the orderly floating of RMB exchange rate should reflect China´s economic fundamentals and meet the needs of macroeconomic management. While a floating RMB exchange rate will promote a more balanced BOP account in general, it dose not address bilateral trade imbalance with any particular country. Third, the RMB currency reform would be gradual, in view of varied degrees to which the corporate sector would respond to changes of the exchange rate. The purpose is to maintain an orderly process of industrial upgrading, maintain the international competitiveness of Chinese enterprises and provide more jobs in the service sector. Fourth, supervision and regulation on short-term capital speculation would need to be strengthened to protect China´s financial system from major external shocks.

Q7: Is it a good timing to further reform the RMB exchange rate now? A: Several arguments support that there is a good opportunity to further reform the RMB exchange rate regime now. First, China´s economic recovery has become more solidly based, supported by enhanced economic stability.  Second, it has become urgent for China to accelerate economic restructuring and improve its growth pattern, in view of the global financial crisis. The reform of the RMB exchange rate regime will facilitate economic restructuring by improving the growth quality and development efficiency. Third, a two-way floating RMB with greater flexibility will also help make the macroeconomic management more proactive and effective, in response to various external shocks.

Q8: Why is a basket of currencies, rather than just the U.S. dollar, taken as the reference for the RMB exchange rate movement? A: As its economy becomes more opened, China´s major trading partners now include a long and diversified list. During the period of January-May this year, trading volume with top 5 trading partners (EU, the U.S., ASEAN, Japan and China´s Hong Kong SAR) accounted for 16.3 percent, 12.9 percent, 10.1 percent, 9.4 percent and 7.5 percent respectively in China´s total trade. Meanwhile, capital and financial account transactions have also diversified across various regions in the world. RMB´s floating with reference to any single currency can neither meet the diversified demand currencies in trade and investment with different partners, nor reflect its effective level. A basket of currencies can meet such demand and reflect the effective RMB level more accurately. Therefore, it is necessary for the managed floating exchange rate regime to be based on market supply and demand with reference to a basket of currencies, and thus make the RMB exchange rate more adaptive to market behaviors.  As China´s trading and investment partners become more and more diversified, it would be more appropriate for enterprises and households in China to switch their attention from just RMB-to-dollar exchange rate to the RMB´s value in terms of a basket of currencies.

Q9: Will the RMB exchange rate fluctuate by a large margin? A: A large fluctuation of the RMB exchange rate would bring considerable shocks to the domestic economic and financial stability, which is not in China´s fundamental interest. Maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level is an important element of furthering the RMB exchange rate reform. The basis for large fluctuation of the RMB exchange rate does not exist. China´s external trade is now gradually becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010, together with the more balanced BOP. The PBC will continue to work for the RMB exchange rate floating within the previously announced band in the inter-bank foreign exchange market. Efforts would be needed to improve  macroeconomic management and foreign exchange administration to maintain macroeconomic and financial stability. This will facilitates China´s economic restructuring and transforming of its development model in a more proactive and effective manner. These in turn would also help create a sound policy environment for the RMB exchange rate stability.

Q10: What impact would further the exchange rate regime reform have on the corporate sector? A: In today´s international monetary system where the exchange rate of major sovereign currencies is floating, the corporate sector has to deal with movements in the exchange rates between home and foreign currencies. Market economy implies that market conditions faced by firms would be constantly changing. Many parameters, including price of raw materials, wage, market demand, product mix, tax rate, and etc, may also change, sometimes even more significantly than the exchange rate itself. Since China began to reform and open up, its economy has become more and more market oriented, and many firms have developed the ability to be more flexible and adjustable in face of changes in market parameters. Let us look at what happened during the period between the start of RMB exchange rate regime reform in July 2005 and the financial crisis in 2008. China´s export increased by an annual average of 23.4 percent, while the exchange rate-sensitive industries such as the textile and light industries kept growing, without any significant losses or massive closures. In general, exchange rate floating has become a driving force in industrial upgrading and opening up, facilitating the growth to be more balanced and sustainable. In recent months, the global recovery is taking hold and the Chinese recovery has gained more solid ground. All these have provided favorable conditions for further reforming the exchange rate regime and reducing its potential negative impact to a minimum. Going forward, efforts will be placed to create favorable environments to encourage firms to make structural and product adjustments. The banking sector will also continue to improve financial services, help enterprises to manage the exchange rate risks, and provide greater support for growth of these firms. Further reforming the exchange rate regime will also be supportive to job creation, particularly in the service sector. Exchange rate floating will turn Chinese exports to be high value-added product based. More jobs will be created by extending the production chains through improved division of labor. In particular, the exchange rate will help improve resource allocation between the tradable and non-tradable sectors, and thus enable the service sector to absorb surplus labor from other sectors, particularly, tradable sectors. At present, the service industry´s share in the national economy is still relatively low, which implies a greater potential for faster expansion and more job opportunities in the service industry. Overall, the positive impacts of further reforming the RMB exchange rate regime on export and job creation will outweigh the negative ones. Continued efforts will be made to create favorable conditions for firms to make sectoral and product adjustment and ensure that the exchange rate regime reform would play a positive role in promoting job creation and greater opening-up.

Q11: How to coordinate exchange rate policy with other policies to promote economic restructuring? A: Exchange rate policy does have a positive role to play in promoting trade balance and expanding domestic demand, whereas it alone would not be enough to address all the structural problems facing China´s economic development. The exchange rate policy has to work together with other measures for structural adjustment and improvement. This, among others, includes the improvement of income distribution structure by increasing the share of household income, the boost of consumer demand, and the strengthening of the social security system. It is also necessary to promote private sector development particularly in the service sector through a greater market access for private capital. Further reform of energy pricing mechanism is also necessary to raise economic efficiency and strengthen the growth sustainability.  In parallel to import expansion, the implementation of the Going Global initiative has to accelerate, and efforts will continue to make it easier for enterprises to make outward investment and for households to purchase and use foreign exchange. The supervision and regulation over capital flows have to be strengthened, and in this regard efforts to identify and penalize foreign exchange-related irregularities have to be stepped up.

Q12: Do you think further reforming the exchange rate regime will have an impact on the use of foreign exchange by enterprises and households? A: One primary task in the foreign exchange administration system reform in China is to facilitate the use of foreign exchange and holding of foreign exchange assets by domestic enterprises and households at lower cost of currency exchanges. Further reform of the RMB exchange rate regime is not expected to increase the cost of currency exchange services offered by banks. In fact, compared with most other countries and regions, the cost of currency exchange for enterprises and households in China is relatively low. At present, the price at which enterprises and individuals purchase and sell foreign exchange at bank counters is determined by adding or deducting a certain spread from the real time price in the inter-bank foreign exchange market. Under the current regulation, the daily trading price of the RMB against the US dollar on the inter-bank foreign exchange market is allowed to float from the central parity of RMB against the U.S. dollar within a band of 0.5 percent. The spread between quoted non-cash US dollar selling and buying prices offered by banks shall not exceed 1 percent of the central parity. The spread between the quoted US dollar cash selling and buying prices offered by banks shall not exceed 4 percent of the central parity. These regulations would continue to be effective.


Submit Date:2010-6-21 15:40:00

http://www.pbc.gov.cn/english/detail.asp?col=6400&id=1489