Fair Currency Coalition

“China Says Onus Is on U.S. to Mend Relations,” Wall Street Journal

China Says Onus Is on U.S. to Mend Relations

Andrew Baston, Terence Poon and Shai Oster

March 8, 2010

BEIJING—China gave little hope that it would accommodate Washington on Iran and other thorny foreign-policy issues, despite the first real sign of flexibility in years over its exchange rate, which has been a growing source of friction with the U.S.

Foreign Minister Yang Jiechi sounded a defiant note Sunday, telling reporters it is up to the U.S. to mend frayed relations, which he said were hurt by American arms sales to Taiwan and by President Barack Obama’s meeting with exiled Tibetan spiritual leader the Dalai Lama. “The responsibility for the difficulties in China-U.S. relations does not lie with China,” Mr. Yang said.

The U.S. played down the comments. “Any relationship is a two-way street. It is fair to say that our relations have just gone through a difficult patch. But we had a high-level delegation in Beijing last week…meetings with Chinese officials including with Foreign Minister Yang. We are determined to re-establish a forward-looking relationship,” State Department spokesman P.J. Crowley said.

Mr. Yang reiterated China’s opposition to sanctions on Iran over its nuclear program, despite intensifying efforts by the Obama administration to win Beijing’s support. “Pressure and sanctions can’t solve the fundamental problem” in Iran, Mr. Yang said. “We don’t think diplomatic efforts have been exhausted,” he added.

Last week, the White House sent two senior China hands, Deputy Secretary of State James Steinberg and the National Security Council’s Asia director, Jeffrey Bader, to Beijing to discuss Iran. Mr. Crowley called the meetings “successful.”

On Saturday, central bank Gov. Zhou Xiaochuan said China will eventually move away from its current exchange-rate policies, which he described as a temporary response to the global financial crisis. But he played down the idea that a move could come in the near future.

Mr. Zhou’s comments on the yuan at a news conference during the annual session of China’s legislature, the National People’s Congress, could fuel optimism in the U.S. and other countries upset over China’s currency policy that Beijing may start letting the yuan appreciate—though not as quickly as many foreign governments desire. Critics complain that the yuan’s suppressed value makes China’s exports unfairly inexpensive, putting other countries at a disadvantage.

Mr. Zhou’s comments Saturday were the most direct suggestion to date by a Chinese official that the yuan’s current de facto peg to the dollar won’t be maintained indefinitely.

Mr. Zhou said the current policy, which has kept the yuan’s value basically unchanged against the dollar since July 2008, was “a part of our package of policies for dealing with the global financial crisis,” adding, “These kinds of policies sooner or later will be withdrawn.”

Economists increasingly expect China will at some point this year allow its currency, officially known as the renminbi, to rise against the U.S. dollar. Inflation in China is picking up as the economy recovers, a problem many economists say a stronger currency could address.

Trade frictions also are on the rise. The currency peg has helped Chinese exporters take advantage of the recent recovery in world trade, but has drawn increasing criticism from the U.S. and Europe as well as China’s Asian neighbors.

“It is encouraging that Gov. Zhou’s statement suggests that the move to a managed float of the renminbi will be resumed once the global recovery firms up,” said Eswar Prasad, a professor at Cornell University who previously headed the International Monetary Fund’s China desk.

Mr. Zhou’s remarks don’t necessarily mean a change is imminent. China’s Ministry of Commerce has stressed the need to continue present policy, especially as the recovery in the export sector remains fragile. On Friday, Premier Wen Jiabao affirmed that China will continue to keep the yuan “basically stable”—though that language is vague enough to allow the leadership some flexibility. Mr. Zhou said prospects will depend on how the global economy evolves.

The political climate is becoming less receptive to such nuances. Mr. Obama told Democratic senators earlier this year that he will “get much tougher” with China on trade issues, including the currency. The U.S. Treasury in April faces its annual decision on whether to formally label China a “currency manipulator.”

Mr. Zhou emphasized that exchange-rate policies need to adapt to changes over time in the structure of the Chinese economy. “The exchange-rate mechanism and the price of the renminbi are in a dynamic process of continuous change,” he said. “So they will differ in different periods.”

—Liu Li in Beijing and
Jared Favole in Washington contributed to this article.

http://online.wsj.com/article/SB20001424052748704706304575107181695862988.html

EPI Event: Currency manipulation: how should the U.S. respond?

Economic Policy Institute:

Currency manipulation: how should the U.S. respond?

A forum featuring Paul Krugman and C. Fred Bergsten

Friday, March 12, 2010

9:30 a.m. to 12:30 p.m.

Currency manipulation makes imports artificially cheap and inflates the prices of U.S. exports, placing U.S. manufacturers “at a huge competitive disadvantage,” as President Obama recently noted.  Research by leading economists has consistently shown that five countries are the most egregious currency manipulators–China, Hong Kong, Malaysia, Taiwan and Singapore.  The EPI Forum on Currency Manipulation will feature economists Fred Bergsten and Paul Krugman, both of whom have recently called for major Chinese currency appreciation.  Business and labor leaders will also discuss the impacts of currency manipulation on U.S. manufacturers and workers.

Please join the Economic Policy Institute for a discussion of these issues with noted experts in this exciting forum.

{RSVP here and below}

Registration begins at 9:00 a.m. Coffee and breakfast will be provided.

Location:
The Mayflower Renaissance Hotel
East Room

1127 Connecticut Avenue NW, Washington, DC 20036
(Near Farragut West (Orange/Blue lines) and Farragut North (Red line))

Panel I: Impacts of Chinese Currency Manipulation on U.S. Businesses and Workers

Moderator:

Scott Paul- Executive Director, Alliance for American Manufacturing

Panelists:

Leo W. Gerard- International President, United Steel Workers

Laurie S. Moncrieff- President, Adaptive Manufacturing Services
and Schmald Tool & Die, Inc.

Panel II:  Chinese Currency Manipulation:  the case for change in U.S. policy

Moderator:

Bruce Stokes, International Economics Columnist, National Journal

Panelists:
Paul Krugman- Columnist, New York Times; Professor, Princeton University and Nobel Laureate

C. Fred Bergsten- Director, Peterson Institute for International Economics

Robert E. Scott- Senior Economist, Economic Policy Institute

Space is limited, please RSVP here to attend this event.

For more information, email events@epi.org.

Ding Qingfen, Overseas direct investment may soar

Overseas direct investment may soar
By Ding Qingfen (China Daily)
Updated: 2010-02-25 08:54

China’s overseas direct investment (ODI) may see a double-digit growth this year to around $60 billion, on the back of government support and overseas expansion plans of domestic firms, officials from the Ministry of Commerce (MOFCOM) said yesterday.

Though foreign direct investment slumped worldwide in 2009, China’s ODI in the non-financial sectors rose 6.5 percent from a year earlier to $43.3 billion.

The growth momentum will be “sustained” this year, and would be even “more stronger”, Liu Zuozhang, director general of the Investment Promotion Agency of MOFCOM, told China Daily.

“There is little doubt that the nation’s ODI in 2010 will climb up to $60 billion,” said Liu, adding the year-on-year growth could range from 15 to 39 percent.

During the first half of 2009, China’s ODI slumped nearly 52 percent as the world economy was still in limbo and domestic enterprises shied away from investment. However, things started to change in the third quarter of last year after ODI rebounded nearly 190 percent year-on-year to $20.5 billion. This was fueled largely by the economic recovery in the United States and European Union and accelerated gross domestic product growth in China.

“The $60 billion target is certainly achievable, as domestic firms are now more convinced about investing abroad,” said Steven Wang, head of the research institute of Standard Chartered in Shanghai.

According to the United Nations Conference on Trade and Development (UNCTAD), global foreign direct investment dropped 39 percent to around $1 trillion in 2009, against a high of $1.97 trillion in 2007.

China is one of the few countries that increased investments during the financial crisis. Most of the overseas investment projects were resource-oriented and backed by the Chinese government.

“This year, the government will continue its measures to help domestic companies spread their wings abroad along with better policies and services,” said Wang Chao, assistant to the minister of commerce.

According to MOFCOM data, China spent nearly $2.36 billion for overseas investment in January this year. Over 70 percent of the investment was made through share purchase.

Forex reserves

“Overseas direct investment will accelerate this year,” said Zhang Xiaoji, director of the Foreign Economic Relations Department of the Development Research Center under the State Council.

“The government’s macro-economic policies and the enterprises’ strong willingness are the main triggers for the growth,” he said.

By the end of 2009, China had foreign exchange reserves of $2.4 trillion, accounting for 30.7 percent of the world total. Analysts are of the opinion that it is risky for China to hold such huge levels of forex while global economic prospects remain uncertain.

“A good way to reduce the risk would be if some of the forex reserves are used to help Chinese companies go overseas,” said Zhang.

Overseas investment could also help Chinese companies better utilize their disposable funds, especially when the government is tightening policies in sectors such as real estate to curb inflation.

Yet another attraction for domestic firms is the relatively low prices needed to buy overseas assets.

http://www.chinadaily.com.cn/bizchina/2010-02/25/content_9500229.htm

Geoff Dyer, “Consequences of stronger renminbi dawn on US”

Consequences of stronger renminbi dawn on US, Financial Times
By Geoff Dyer in Beijing

Published: February 23 2010 17:50 | Last updated: February 23 2010 17:50

The last time US unemployment hit double figures was in in the early 1980s, when one of the hit films was Red Dawn, a tale of a frustrated Soviet invasion of Colorado that played on the economic insecurity of the time.

With the number of people out of work hovering around the same level again, Red Dawn is being dusted off for a remake. Except this time it is the Chinese, not the Soviets, who are the baddies. The film, whose cast includes Tom Cruise’s son Connor, begins with the Chinese army taking over downtown Detroit.

In such a climate, it should come as no surprise that China’s currency continues to be a hot political issue.

President Barack Obama recently intensified his calls for China to revalue its currency, arguing that more exports to Asia would mean “hundreds of thousands, maybe millions of jobs here in the US”.

An estimate by the Peterson Institute of International Economics that the Chinese currency is undervalued by 41 per cent against the dollar was widely picked up in the US, adding to the popular view that China has a large and unfair advantage coming out of the crisis.

Financial markets are also buzzing with speculation that China is about to make a currency move.

Jim O’Neill, the Goldman Sachs economist and “Brics” guru, caused a stir last week when he said “something is brewing in Beijing”.

This is not the place to rehearse the arguments about appreciation, other than to say that they are becoming stronger as Chinese inflation rises. And the Peterson Institute was not actually recommending a 41 per cent appreciation, but only trying to put a number on the level of undervaluation. Most economists expect only a very modest increase in the value of the renminbi.

Yet it is worth pointing out that a revaluation of that level would actually exacerbate the very fears behind a film such as the new Red Dawn. Aimed at levelling the playing field, it could instead change the way many people think about China.

The Chinese economy is currently the third largest in the world measured in dollar terms, just behind Japan. A 41 per cent appreciation in the renminbi would catapult China way beyond Japan and leave it half the size of the US. When Mr O’Neill forecast that China would overtake the US by 2027, some scoffed. All of a sudden, those guestimates would start to look a lot more on the money.

The US dwarfs China in spending on research and on its military and will do so for years to come. But after a big revaluation, China’s budgets in these areas would be equivalent to about a quarter of those in the US – enough to seem like a real competitive threat.

One of the things that would not change is the value of China’s mammoth foreign exchange reserves, which have been the subject of so much misplaced angst about Beijing becoming the US’s banker. But what about China’s commercial banks? ICBC was already the biggest bank in the world last year by market capitalisation: after a 40 per cent currency appreciation, its mainland shares would give it a market value double that of JPMorgan Chase, the biggest US bank. PetroChina would be one and a half times the size of ExxonMobil. No prizes for guessing what US investment bankers would be telling Chinese companies.

By this stage, economists are probably grumbling that exchange rates only reflect relative prices and that a big appreciation would not give the Chinese government a single renminbi more to spend on scientists or soldiers (although it would have quite a few unhappy exporters on its hands).

But there is a bigger point. When some of the more extravagant claims about “China’s century” are made, plenty of people – myself included – often point to the many obstacles ahead and stress how poor a country China still is. Yet maybe the fact that the currency has been kept so artificially low has obscured just how far China has already come.

The revamped Red Dawn says something about the anxieties that China is already provoking. With a much stronger currency, China would loom even larger in the US consciousness. It would reinforce the perception that China is not just a rival for the distant future but is swiftly becoming an economic and military match for the US.

The phrase “be careful what you ask for” works as well in Chinese as English.

http://www.ft.com/cms/s/0/33e6db68-20a0-11df-9775-00144feab49a.html

Li Jing, “Holdings of US Treasury debt slashed”

Holdings of US Treasury debt slashed
By Li Jing (China Daily)
Updated: 2010-02-18 06:59

China sold $34b in bonds in Dec; Japan becomes biggest foreign holder

China drastically slashed its holdings of United States government debt last December, allowing Japan to retake its place as the largest foreign holder of US Treasury bonds.

China sold more than $34 billion in short- and long-term bonds, leaving its total holdings at $755.4 billion, according to US Treasury data released on Tuesday.

The country sold about $45 billion in US Treasuries in the last five months, Alan Ruskin, chief international strategist for RBS Securities Inc, said in a research note. He said it was a “long enough period to hint strongly at a trend”.

Liu Yuhui, an economist with the Chinese Academy of Social Sciences (CASS), said now is a good time to cut holdings of US Treasuries as recent European debt concerns have driven up the US dollar.

“China has chosen the right strategy in slashing its huge holdings of US government debt as the greenback rebounds,” said Liu, adding that there is no sign of change to the long-term weakness of the US dollar.

Massive US deficit spending and near-zero interest rates would also further erode the value of US bonds, said Cao Honghui, director of financial market research at CASS.

The White House released a budget plan on Feb 1 that predicted the deficit for this year would total a record $1.56 trillion, surpassing last year’s $1.4 trillion, which re-ignited China’s concern about its dollar assets.

As one of the US’ biggest creditors, China has sought to diversify its portfolio of foreign exchange reserves over the past year as the share of US dollar-dominated assets is too large.

Premier Wen Jiabao said in March last year he was “worried” about the Treasury holdings and wanted assurances his country’s US investments were safe, while Zhou Xiaochuan, governor of the People’s Bank of China, proposed a new global currency to reduce reliance on the US dollar.

The net sales of US Treasuries in past months by China might carry a subtle economic and political message to the US, according to Eswar Prasad, a trade policy professor at Cornell University and former head of the International Monetary Fund’s China division.

“Chinese leaders are deploying their reserves to try and pressure the US to stop haranguing China about its currency and trade policies, and to back off from interference in its domestic issues,” he was quoted by AFP as saying.

However, Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington, said he believes the dramatic cut in US Treasuries is purely a market move.

The China-US relationship was still relatively smooth last December so the political implications should not be over-emphasized, he told Xinhua News Agency.

The foreign holdings of US Treasury securities fell by $53 billion in December, surpassing the previous record drop of $44.5 billion in April last year.

While China cut its holdings of the US long-term securities, Japan and Britain increased their stakes.

Japan boosted its holdings of US Treasuries by $11.5 billion to $768.8 billion in December, outpacing China’s $755.4 billion in the same month. Britain also increased its holdings to $302.5 billion from $277.6 billion.

Brazil boosted its holdings to $160.6 billion from $157.1 billion.

Xinhua, AFP contributed to the story

http://www.chinadaily.com.cn/cndy/2010-02/18/content_9472773.htm

China’s forex reserves account for 30% of world total

China’s forex reserves account for 30% of world total
(People’s Daily)
Updated: 2010-02-20 14:38
By: Staff Reporter

China’s foreign exchange reserves hit $2.4 trillion, accounting for 30.7 percent of the world’s forex reserves, according to foreign media.

It’s said that with the recovery of the global economy in 2009, the national foreign exchange reserves will also see a significant rise. According to statistics, China’s foreign reserve occupied 30.7 percent of total global reserves. BRIC countries (China, Russia, Brazil and India) are very much at the forefront, with $3.31 trillion reserves, accounting for 42.3 percent; while the G7 have only account $1.24 trillion.

It’s also understood that China’s foreign reserve in 2009 increased by more than 23 percent, equaling nearly 2 times the forex reserves of the G7. As a G7 member, Japan’s reserves are about $1 trillion, ranking the second largest country in forex reserves.

According to the survey, among the world’s ten largest reserves countries, there are seven countries from Asia. As for the United States, with its $45.4 billion foreign exchange reserves, it is only $2.4 billion more than Nigeria ($43 billion).

http://www.chinadaily.com.cn/bizchina/2010-02/20/content_9477391.htm

Robert Cookson and Michael Mackenzie, “Beijing’s rebalancing raises fears for Treasuries”

Beijing’s rebalancing raises fears for Treasuries, Financial Times

By Robert Cookson and Michael Mackenzie

Published: February 19 2010 02:00 | Last updated: February 19 2010 02:00

Burgernomics shows the Chinese yuan is still undervalued

The Big Mac index
Taste and see
Burgernomics shows the Chinese yuan is still undervalued

Jan 6th 2010 | From The Economist online

THE Big Mac index is based on the theory of purchasing-power parity (PPP)—exchange rates should equalise the price of a basket of goods in different countries. The exchange rate that leaves a Big Mac costing the same in dollars everywhere is our fair-value benchmark. So our light-hearted index shows which countries the foreign-exchange market has blessed with a cheap currency, and which has it burdened with a dear one. The most overvalued currency against the dollar is the Norwegian kroner, which is 96% above its PPP rate. In Oslo you can expect to pay around $7 for a Big Mac. At the other end of the scale is the Chinese yuan, which is undervalued by 49%. The euro comes in at 35% over its PPP rate, a little higher than half a year ago.

RMB is not a cure-all for US economy: IMF

RMB is not a cure-all for US economy: IMF
(China Daily/Xinhua)
Updated: 2010-02-17 09:32

WASHINGTON: An appreciation of the Chinese yuan will help US economic growth but it will not solve problems in its own economy, the International Monetary Fund (IMF) chief economist said Monday.

A 20 percent appreciation of the yuan, formally known as renminbi or RMB, along with a similar currency appreciation by other emerging Asian economic entities may lead to an increase of about 1 percent of the US gross domestic product, Olivier Blanchard said, basing the prediction on an IMF model.

“This would be good news for US growth but this is clearly not enough by itself to sustain growth in the United States,” the IMF chief economist told Xinhua News Agency.

The yuan exchange rate with the US dollar has long been a target of criticism in the US and some European countries.

But Blanchard took a different view.

In a recent interview, he said that the appreciation of the RMB is not a panacea for the United States, nor for the rest of the world.

On Monday, Blanchard again stressed that a discussion on China’s macro-economic policy should start with the savin rate and not with the exchange rate.

“There is wide agreement that the current Chinese saving rate is too high, that it reflects insufficient social insurance for households, governance problems in firms and low financial access,” he said.

Blanchard, an economist from France, said that it is “very desirable” for China to take measures in the fields of healthcare, the retirement system, distribution of profits by companies or financial institutions. He added that the Chinese government has already begun taking measures along these lines.

He believes that with these measures already taking effect and the increase of China’s domestic demand, China will “need to redirect resources towards this increased domestic demand and to avoid over-heating”.

“The right tool to do that is an appreciation of the RMB,” he explained. “This is the context in which we should think about the RMB appreciation as we look to sustained growth in China over the medium run.”

Deborah Solomon & Mark Gongloff, “China Unseated as Top U.S. Debt Holder”

China Unseated as Top U.S. Debt Holder, Wall Street Journal

February 17, 2010

Deborah Solomon and Mark Gongloff

WASHINGTON—China sold a record amount of its U.S. Treasury holdings in December, ceding its place as the world’s biggest foreign holder of U.S. debt to Japan.

The move triggered concerns about China’s continuing appetite to loan money to the U.S. amid a mounting budget deficit here and tensions between Washington and Beijing.

China pared its Treasury holdings by $34 billion to $755.4 billion in December, placing it second behind Japan, with $768.8 billion, according to U.S. Treasury estimates. For the first time since August 2008, Tokyo took over the top spot after steadily increasing its purchases over the past several years.

Policy makers, economists and others have long worried about what would happen if China tired of its role as a key creditor to the U.S., which continues to borrow record sums amid the economic downturn.

Chinese officials have begun expressing “worries” over its significant holdings of U.S. government bonds and expressing concern about the U.S. budget deficit, which is expected to hit $1.6 trillion.

“These might be contributing to the fact that China had some small pullback in U.S. securities,” said Gregory Daco, an economist with IHS Global Insight.

However, China’s sales of Treasurys don’t necessarily translate into a loss of confidence in the U.S., many analysts said, noting that Beijing’s moves in December could simply indicate steps toward diversification. Market observers said the Chinese may simply have moved their money into other dollar-denominated assets, such as corporate debt or private equity.

The increase for Japan appears to have come from private financial institutions shifting investments out of risky, high-yielding foreign financial products into safer assets such as U.S. Treasurys, analysts say.

Ted Truman, a former Federal Reserve official now at the Peterson Institute for International Economics in Washington, noted that while the holdings China shed represent a record one-month sum, it’s a “drop in the bucket” compared with China’s overall holdings.

China continues to be a net buyer of longer-dated Treasury debt—adding $4.6 billion in December, for example—which it might not do if it were convinced U.S. debt was a bad long-term investment.

Some economists said China’s selling was cause for modest concern but noted it occurred before the recent sovereign-debt worries in Europe, prompted by fiscally strapped Greece and concerns over the pace of the global recovery. Those concerns have pounded the euro and driven many investors back to the relative safety of U.S. Treasury debt.

China’s selling may have been less severe than the data suggest, because the Treasury International Capital data don’t take into account what Beijing bought through offshore buyers in other countries. By virtue of China’s large Treasury holdings, the two countries have grown financially interdependent, making a sustained sell-off less likely.

Purchases of U.S. debt remained relatively healthy from November to December, with buyers such as Japan, the U.K., Brazil and Caribbean banking centers stepping up acquisitions.

China’s foreign currency reserves rose to nearly $2.4 trillion at the end of last year. For most of the past decade, China’s government has taken much of the money pouring into the country as a result of its trade surplus and parked it in relatively safe U.S. government debt.

The accumulation of U.S. holdings is a political problem for Washington and Beijing. Chinese analysts have occasionally raised the idea of using Treasury sales to influence the U.S. during disagreements about economic policy or other issues, such as Taiwan. But government officials have steered clear of such threats. Any sign China might dump its Treasurys would likely hammer U.S. debt prices, sending the value of China’s holdings plummeting.

Chinese officials have become increasingly vocal about Washington’s need to tame the budget deficit. But analysts say those concerns are unlikely to prompt any sharp shifts in China’s investment behavior—in part because alternatives are limited. There are few asset classes big enough to absorb the volumes China needs to invest, and those that are—such as European and Japanese government debt—are subject to some of the same concerns raised about U.S. debt. Chinese central bank officials have said they remain committed to holding dollar assets.

—Jeff Bater, Jason Dean
and Tomoyuki Tachikawa contributed to this article.

http://online.wsj.com/article/SB20001424052748704804204575069172269719754.html