“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

Further Reform the RMB Exchange Rate Regime and Enhance the RMB Exchange Rate Flexibility, People’s Bank of China

People’s Bank of China Statement

Further Reform the RMB Exchange Rate Regime and Enhance the RMB Exchange Rate Flexibility

In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.

Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role.

When the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the U.S. dollar depreciated by varying margins. The stability of the RMB exchange rate has played an important role in mitigating the crisis´ impact, contributing significantly to Asian and global recovery, and demonstrating China´s efforts in promoting global rebalancing.

The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.

In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.

China´s external trade is steadily 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. With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist. The People´s Bank of China will further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.

Submit Date:2010-6-19 19:00:00

Geoff Dyer and Alan Beattie, “Beijing cautious despite end to peg”

Beijing cautious despite end to peg, Financial Times

By Geoff Dyer in Beijing and Alan Beattie in Washington

Published: June 20 2010 13:11 | Last updated: June 20 2010 19:54

China is set to allow a gradual appreciation of the renminbi against the US dollar after warning that the exchange rate would remain “basically stable” in spite of a decision to abandon its currency peg.

The Chinese central bank announced an end to the peg in a statement on Saturday, one week before the G20 summit in Toronto where Beijing was likely to have come under strong pressure over the level of the renminbi.

But in a follow-up statement on Sunday it stressed that a substantial appreciation in the currency was “not in China’s interests” and that the exchange rate would remain “basically stable”.

The statements appeared to be a delicate political compromise aimed at defusing mounting international criticism of its exchange rate, especially in the US, but which reflects the lack of domestic support for a significantly stronger currency given problems in Europe which have led to a weakening of the euro.

The result is likely to be a gradual appreciation of the renminbi, after nearly two years when the rate against the dollar has remained unchanged. Most analysts expect only very modest strengthening in the short term. The daily trading bands for the currency are not to be widened although the midpoint, set daily by Chinese authorities, will probably shift.

Tim Geithner, US Treasury secretary, said: “We welcome China’s decision to increase the flexibility of its exchange rate.” But he added that “vigorous implementation” was needed to help boost the global economy.

There was a critical response from Senator Charles Schumer, who has been pushing for legislation over China’s exchange rate. “Just a day after there was much hoopla about the Chinese finally changing their policy, they are already backing off,” he said. “It vindicates our initial scepticism. We intend to move forward as quickly as possible with legislation.”

Li Daokui, a Tsinghua university professor and member of the Chinese central bank’s monetary policy committee, said that the decision to abandon the peg reflected increased confidence among policymakers about both the outlook for China and the global economy.

“It symbolises the end of anti-crisis policies,” Mr Li said. He added that China took the initiative because they do not want to be pushed into a “game of negotiation”, such as the 1985 Plaza Accord that led to a sharp appreciation in the yen.

Stephen Green, an economist at Standard Chartered in Shanghai, said: “There is very little appetite for appreciation, so in the short term the central bank is likely to be very conservative.

“As a result, the US-China relationship could still be very tricky.”

http://www.ft.com/cms/s/0/4c0d04a4-7c50-11df-8b74-00144feabdc0.html

Keith Bradsher, “China Signals a Gradual Rise in Value of Its Currency”

China Signals a Gradual Rise in Value of Its Currency, New York Times

By Keith Bradsher
Published: June 19, 2010

HONG KONG — China announced on Saturday evening that it would allow greater flexibility in the value of its currency, a move that could deflect growing international criticism of its economic policies and defuse one of the greatest sources of tension between Beijing and Washington.

The statement, by China’s central bank, was the clearest sign yet that the country would allow its currency to appreciate gradually against the dollar. World leaders are due to meet next week in Canada for economic talks, and China’s currency policies had appeared a certain source of conflict.

The United States has been leading a chorus of countries urging China to let its currency fluctuate. Many members of Congress believe China’s exchange rate policy gives it an unfair trade advantage, and a movement has been growing to take retaliatory trade action if China did not make an adjustment.

President Obama and the Treasury secretary, Timothy F. Geithner, immediately praised China’s action. “China’s decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy,” Mr. Obama said in a statement. The European Commission also said it supported the move.

But it remains to be seen whether the move will significantly rebalance the global trade picture. The People’s Bank of China was cautious in its statement about how far its currency, the renminbi, might fluctuate, warning explicitly that “the basis for large-scale appreciation of the RMB exchange rate does not exist.” Chinese officials said the renminbi would move in relation to an unspecified basket of currencies, not just the dollar. Experts said that depending on how the system was designed, China could avoid rapid fluctuations.

Mr. Geithner alluded to this in a statement, saying, “This is an important step, but the test will be how far and how fast they let the currency appreciate.”

The first sign of how much currency appreciation will be tolerated is likely to come Monday morning, when the Chinese government will set the initial trading band for the value of the renminbi in Shanghai trading.

China has kept its currency value low since mid-2008 by pegging it to that of the dollar and not letting it fluctuate. Any trend in the renminbi’s value would have been higher without the peg, making China’s goods more expensive to foreign consumers and possibly slowing the country’s export-based economy.

In its statement Saturday, the central bank said that the Chinese economy was strengthening after the crisis and that it was “desirable to proceed further with reform” of the currency. Tellingly, the announcement was made almost simultaneously in Chinese and in English, a rare occurrence, and Chinese officials advised foreign governments beforehand that they were about to take a new stance on currency policy, according to an American official.

Though China said its action was based on the interests of its own economy, it has been under rising pressure from the United States, the European Union, Brazil and India. Mr. Obama had held repeated conversations with President Hu Jintao over the last year or so, the most recent of which was two weeks ago, and Mr. Geithner traveled to China for meetings last month.

China has handled currency policy gingerly, fearing that its people might see appreciation as a step taken in response to foreign pressure that might not be in the national interest.

For Mr. Obama, China’s currency has been a particularly sticky problem. He also has been leaning on Beijing to help contain the nuclear programs of Iran and North Korea, to act as one of the main engines for the world economy, and to moderate its efforts to gain exclusive access to raw materials around the world needed to fuel China’s huge growth.

But Mr. Obama’s leverage has been minimal, and in the end it may have been the threat of a Congressional bill’s protectionist actions against Chinese products that convinced Beijing that it had to begin to free its currency.

That threat had been gaining ground in Congress among lawmakers convinced that China was keeping its currency value artificially low to the detriment of the American economy.

“China’s currency practice has cost American jobs and hurt American ranchers, farmers and small businesses,” Max Baucus, Democrat of Montana and the chairman of the Senate Finance Committee, said in a statement Saturday. “Today’s announcement is a welcome first step to help keep American businesses competitive and create more American jobs.”

Senator Charles E. Schumer, Democrat of New York, however, cautioned that unless China gave further detail to its plan, “we will have no choice but to move forward with our legislation.”

If the renminbi were to rise significantly, goods from the United States and other countries could eventually start displacing Chinese exports. That could help fuel economic growth in many of China’s trading partners, while braking growth in China, which has been expanding so fast that inflation is now accelerating.

Rising wages after recent labor unrest, combined with a stronger currency, may also make China a more attractive consumer market for international companies. But this could help Europe more than America, whose exports to China have been weak and concentrated in a few categories like aircraft, turbines and soybeans, while European companies have been more successful in selling high-end consumer goods there.

For China, a stronger renminbi will increase the buying power of its consumers and could make gasoline and other imported commodities seem less expensive. Faced with spreading labor unrest, particularly in the auto industry, the government has started to make an energetic effort to improve the standard of living of industrial workers.

But many economists inside and outside China have argued that currency appreciation is in China’s interest most of all. The country has been spending nearly one-tenth of its annual economic output to buy Treasury notes and bonds and other foreign securities while printing and selling renminbi, all in an effort to prevent the renminbi from rising against the dollar.

The renminbi has already risen with the dollar by 15 percent against the euro in the last two months. That has made Chinese officials nervous about the future competitiveness of Chinese sales to Europe, the biggest market for Chinese exports.

Cui Tiankai, a vice foreign minister, said on Friday that the value of the renminbi was not a subject for global discussion, the latest in a series of remarks by Chinese officials indicating strong nationalistic sensitivities about currency policy.

But people familiar with Chinese currency policy making have been saying for two months that the Chinese leadership agreed in early April to a change of direction. A devastating earthquake in western China in mid-April followed by worries about economic turmoil in Europe delayed action on the decision.

David E. Sanger and Sewell Chan contributed reporting from Washington.

http://www.nytimes.com/2010/06/20/business/global/20yuan.html

Yukon Huang, “China can let the renminbi depreciate”

By Yukon Huang, Financial Times

Published: June 10 2010 23:13 | Last updated: June 10 2010 23:13

The plunge in the euro and threat of persistent economic instability has caused the Chinese government to take a more cautious approach to adjusting its exchange rate. But ironically, the collapse of the euro presents a golden opportunity for China to introduce greater exchange rate flexibility. China should do this now, rather than wait for the crisis to abate. And to the surprise of many, it should begin by letting the value of the renminbi depreciate rather than appreciate.

Chinese authorities have been reluctant in the past to appreciate the exchange rate in response to global pressure because when markets are convinced that the renminbi will rise – even gradually – in value over the foreseeable future the rise will encourage speculative capital inflows. Over the past decade, estimates suggest that perhaps 20-40 per cent of the annual capital inflows have been “hot money” pursuing the likelihood that the currency would appreciate either steadily or in measured steps. Such inflows intensify pressure for further appreciation and create negative results that China is already struggling to address.

Damaging consequences include excess liquidity and lower than desired interest rates that help push up investment – notably real estate – to unsustainable levels, and raise the prospect of a major collapse in asset values. Housing prices in Beijing and Shanghai are clearly inflated and demand continues to grow unabated. While unit values have doubled in many cases in the past year, rents are stagnant. Apartments remain empty as owners wait to “flip” their holdings. With these concerns, one-way bets on the exchange rate are not something China should encourage.

There are two problems with China’s exchange rate: one, the value of the renminbi and, two, its flexibility. Despite conventional wisdom, it is actually more important to tackle the latter first, rather than fretting about the former. China and the rest of the world have more to gain from Beijing adopting a flexible exchange rate.

The renminbi has been pegged to the US dollar for nearly two years and since November the euro has fallen nearly 20 per cent against the renminbi. Given the importance of the European market to China – and east Asia as a whole – the renminbi’s sharp appreciation relative to the euro provides China with an opening to begin the process of allowing the renminbi to fluctuate within a wider band. Chinese officials have publicly indicated they would allow this. Initially, the renminbi – to the surprise of many – could depreciate a few percentage points relative to the dollar before going up, due to the temporary turbulence in the eurozone.

China’s key objective should be to move to a more flexible exchange rate system that does not have any pre-ordained bias in moving up or down. When China broke the fixed peg to the dollar in 2005, it embarked on a steady but gradual appreciation of the renminbi until August 2008, when the renminbi was repegged to the dollar.

During this period, the unspoken rule was that the rate of appreciation would not exceed 6-7 per cent a year. Anything more than 7 per cent would encourage excessive capital inflows as investors would be guaranteed an attractive return after allowing for differentials in interest rates between financial centres and the costs of transactions for moving funds across markets. Even with an appreciation of about 20 per cent over these three years, capital inflows continued and pressures to appreciate did not fade.

With pressures building over the past two years, market watchers are speculating that the needed adjustment is much larger than a gradual appreciation of 6 to 7 per cent. Still, the government remains adamantly against any major or sudden adjustments and reluctant to embark once again on a gradual appreciation in one direction that would not necessarily solve the problem – and, in fact, could make it worse.

The question remains: if the market determined the value of the renminbi, would it be higher or lower in five years? It is widely believed that the currency would appreciate owing to persistent trade surpluses and China’s abundant foreign reserves. But, even with the lack of movement in the renminbi’s value, China’s competitiveness is already eroding as inflation accelerates, pressures for significant increases in real wages mount, and property values continue to rise. Perhaps the most challenging aspect for the government is the pressure on labour markets as reflected in the highly publicised strikes in southern China, which reflect not so much a shortage of labour per se but more the unwillingness of the newer generation of migrants to relocate when equally attractive opportunities nearer to home are now emerging.

It is also worth noting that most Chinese households and companies find it difficult to move funds abroad given existing capital controls. Many have yet to consider the possibility that owning property in another country could be even more attractive. But with growing sophistication in considering investment alternatives and greater flexibility in transferring funds, the Chinese – like all others with significant assets – will diversify their holdings more quickly by shifting capital abroad. Prudently diversifying assets could mean the renminbi will get weaker rather than stronger over time on a “market basis”. Its value in the next few years is anyone’s guess – the way it should be.

The writer is a senior associate at the Carnegie Endowment for International Peace and former country director for the World Bank in China

Fred Bergsten, “New imbalances will threaten global recovery”

New imbalances will threaten global recovery, Financial Times
By Fred Bergsten

Published: June 10 2010 03:00 | Last updated: June 10 2010 03:00

Global imbalances are about to jump again. New estimates from the Organisation for Economic Co-operation and Development suggest that the sharp decline in the exchange rate of the euro, along with tepid European growth, will produce eurozone surpluses of at least $300bn (€251bn, £208bn) annually within the next few years. The tightening of fiscal policies throughout Europe in response to the crisis, along with the new balanced budget amendment in Germany, will both depress domestic demand and require easier monetary policy that will weaken the euro further.

No one would accuse the eurozone of competitive devaluation. However, there is considerable satisfaction throughout Europe with the weak currency. Martin Wolf of this newspaper has already characterised Europe’s de facto strategy to export its way out of stagnation as “stumbling into a beggar-my-neighbour policy”.

Whatever the intent, these European developments will have effects similar to the overt steps taken by other major countries to enhance their trade competitiveness. The most extreme case is the massive intervention by China and surrounding countries to keep their currencies severely undervalued. Other emerging markets are likewise seeking to expand further their war chests of foreign exchange by running large external surpluses. Switzerland has intervened substantially to hold its currency down. The eurozone has joined this “new mercantilism” and the result will be a sharp rise in global imbalances.

The counterpart increases in deficits will again accumulate mainly in the US as no other country could attract the requisite financing. The large deficit countries within the eurozone must reduce their imbalances. Along with the large surpluses of China and other Asian countries, the new European surpluses will probably double the American current account deficit beyond its previous record of $800bn in 2006. The US could then maintain its recovery only by continuing to run large budget deficits and again tolerating debt-financed consumer demand. This is the opposite of the rebalancing strategy agreed by the Group of 20 leading economies as critically important for sustaining global expansion and reiterated by its finance ministers last weekend.

Many regard this scenario as a desirable resolution of the current European crisis. Investor proclivities to buy Treasury securities and dollars could finance the American deficits for a while. The US would provide the global collective good, as in the past, by accepting increased dollar overvaluation and further increases in its external debt and deficits.

There are three glaring problems with this vision, however, all centred on the US. First, the sharp escalation of its own domestic and international imbalances would intensify the risk of future market attacks on the dollar and US financial assets. As soon as Europe and other alternatives regain their acceptability to investors, the unsustainability of the US situation would return to centre stage at even more dangerous levels.

Second, the higher imbalances themselves could sow the seeds of a new financial crisis just as they helped sow the seeds of the last crisis. Such huge inflows of foreign capital would keep US financial markets excessively liquid, hold interest rates down, promote underpricing of risk and thus again generate irresponsible lending and borrowing.

Third, a renewed explosion of the US trade deficit could well trigger the outbreak of protectionist trade policies that has been largely avoided to date. With unemployment remaining very high, job losses to the “new mercantilism” abroad are likely to incite strong political reactions. The virtual absence of a positive trade policy under President Barack Obama has created a dangerous vacuum in which new import restrictions, especially aimed against “unfair exchange rates,” could readily prevail.

At its upcoming summits in Toronto and Seoul, the G20 must adapt its rebalancing strategy to prevent this new threat to continued recovery and lasting global stability. Surplus Germany, along with China and Japan, must stimulate domestic demand. China must let the renminbi strengthen substantially. Joint intervention in exchange markets should prevent or reverse any significant further fall in the euro. Additional allocations of Special Drawing Rights would enable countries to build reserves without running trade surpluses.

Most importantly, the US must convince the world it is unwilling again to become the consumer and borrower of last resort. Only then will other countries stop relying on rising trade surpluses and become serious about generating domestic demand. Such a US strategy will of course focus on medium-term fiscal correction and increased private saving. But it will also have to end the chronic dollar overvaluations of the last 30 years, and euro depreciation along with continued renminbi manipulation will inevitably push currency issues back to the top of the global agenda. The writer is director of the Peterson Institute for International Economics in Washington