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.

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

Geithner letter to G20 finance ministers

Geithner letter to G20 finance ministers, Reuters

BUSAN, South Korea, June 5 (Reuters) – Following is the text of a June 3 letter by U.S. Treasury Secretary Timothy Geithner to his G20 counterparts who are meeting on Saturday in South Korea.

“Looking ahead to the meetings in Busan this weekend and the Toronto Summit later this month, I am writing to offer some suggestions on how we might focus our efforts.

“First, we should reaffirm our commitment to safeguard the recovery and strengthen prospects for growth. The G-20′s strong policy response to the crisis has played a pivotal role in restoring economic growth, but concerns about growth as Europe makes needed policy adjustments threaten to undercut the momentum of the recovery. Europe has outlined a strong package of reforms and financial support to address those concerns, and full implementation of those commitments will help limit the risks to global recovery. But we all have a strong interest in working to reinforce the ongoing recovery in private demand.

“Second, we all need to undertake economic reforms that will help support short-term demand growth and boost longer-run potential growth. This should include structural reforms designed to make our economies more flexible, dynamic and productive and to enhance the role of internal demand in surplus economies.

“Third, achieving a strong and sustainable global recovery requires that we make further progress on rebalancing global demand. Given the broader shifts underway in the U.S. economy toward higher domestic savings, without further progress on rebalancing global demand, global growth rates will fall short of potential. In this context, we are concerned by the projected weakness in domestic demand in Europe and Japan. In keeping with the Pittsburgh Framework on Strong, Sustainable, and Balanced Growth, the necessary shift toward higher savings in the United States needs to be complemented by stronger domestic demand growth in Japan and in the European surplus countries, and sustained growth in private demand, together with a more flexible exchange rate policy, in China.

“Fourth, we need to put in place credible commitments to restore fiscal sustainability over the medium term. These plans need to be designed, to borrow the IMF’s phrase, in ways that are ‘growth friendly,’ recognizing that the necessary path of adjustment will vary across countries.

“Fiscal reforms are necessary for growth, but they will not succeed unless we are able to strengthen confidence in the global recovery. The challenge is to demonstrate the capacity to deliver fiscal sustainability over the medium term without creating the perception that this will require a generalized, undifferentiated, move to pull forward consolidation plans. The necessary and inevitable withdrawal of fiscal and monetary stimulus needs to be calibrated to proceed in step with the strengthening of the private sector recovery in our economies.

“Fifth, further progress on financial repair is critical to global economic recovery. This requires, particularly in parts of Europe, further efforts to restructure and recapitalize the banking system.

“This process would be advanced by a reaffirmation by governments of existing capital and guarantee programs, and by a broader effort to enhance transparency and disclosure of the major interconnected financial institutions.

“Finally, we should accelerate progress on our financial reform agenda. In the United States, both chambers of Congress have now passed bills that address all of the major principles agreed to among the G-20, and we expect a strong package of reforms to become law this summer.

“In the G-20 and FSB we have broad agreement on the major elements of financial reform, and we have made enough progress now on the details in key areas that we should be able to move forward on a more ambitious timetable than we set out in Pittsburgh.

“Uncertainty about the ultimate shape of these new rules creates potential financial headwinds for recovery. We should reduce that risk by trying to move forward quickly on the key elements of the international financial reform agenda:

“We should work to reach agreement as expeditiously as possible on the broad elements of a new capital framework, including the new overall capital and leverage ratios, the length of the transition period, the key issues on new definitions, and liquidity requirements. We would then aim to finalize the specifics by the Seoul Summit. We can improve confidence and help recovery by clarifying both the magnitude of the increase in required common equity and a transition period that will provide sufficient time for financial institutions to meet the new rules without being forced to reduce assets in a way that could damage economic recovery. Higher quality and more capital, stronger liquidity, and lower leverage will help ensure that globally active financial institutions are better able to withstand financial and economic shocks. This is the central and core reform needed to promote a more resilient global financial system in the aftermath of the crisis . We should agree to put place across the major financial markets a consistent framework for oversight of derivatives markets. We should subject all dealers and all major participants in the derivative markets to supervision and regulation, including conservative capital and margin requirements, disclosure and reporting requirements, and strong business conduct standards to mitigate the potential for systemic risk and market abuse. . We should agree on a stronger framework of transparency and disclosure requirements across institutions and markets. . And we need to move forward on the emerging framework for managing the failure of large, global financial institutions, with stronger national resolution frameworks, and principles for how to cover the financial costs of financial crises. These elements should be the heart of the message we deliver at Busan and Toronto.

“We also will want to make progress on the full range of other commitments we made in Pittsburgh, from phasing out inefficient fossil fuel subsidies to advancing the reforms of the international financial institutions.”

http://www.cfdspros.com/news/commodities—futures-news/text—geithner-letter-to-g20-finance-ministers-110603

Chris Giles and Alan Beattie, “China reprimanded by G20 leaders”

China reprimanded by G20 leaders, Financial Times

By Chris Giles in London and Alan Beattie in Washington

Published: March 30 2010 19:05 | Last updated: March 30 2010 19:05

Five prominent members of the Group of 20 leading economies, including the US and UK, sent a coded rebuke to China on Tuesday against backsliding on economic agreements.

In a letter to the rest of the G20 that shows frustration at slow progress this year, the leaders warned: “Without co-operative action to make the necessary adjustments to achieve [strong and sustainable growth], the risk of future crises and low growth remain.”

G20 officials said the letter – signed by Stephen Harper and Lee Myung-bak, the Canadian and South Korean leaders who will chair the group’s two summits this year, Barack Obama, US president, Gordon Brown, UK prime minister, and Nicolas Sarkozy, French president – was an attempt to restore flagging momentum to the international process.

Ottawa and Seoul are concerned that the G20 summits they will host, in June and November respectively, might fail to live up to expectations.

In a move that will irritate China, the five leaders specifically raised the issue of exchange rates in relation to reducing trade imbalances, a topic the G20 avoided in 2009 to help secure agreement at the London and Pittsburgh summits.

“We need to design co-operative strategies and work together to ensure that our fiscal, monetary, foreign exchange, trade and structural policies are collectively consistent with strong, sustainable and balanced growth,” the letter said.

It has been released in the middle of an intense debate in Washington about how the White House should confront Beijing over the perceived strength of the renminbi. Some lawmakers are ratcheting up calls for China to be designated a currency manipulator in a forthcoming report.

Charles Schumer, the third most senior Democrat in the Senate, this week again advocated a bill that would allow the US to include estimates of currency misalignment when calculating anti-subsidy duties to be imposed on imports.

As well as refusing to budge on its currency, China has been obstructing the G20 process this year. It has hampered efforts by the International Monetary Fund to issue a report which Dominique Strauss-Kahn, managing director, told the Financial Times in January would conclude that national strategies for growth around the world “will not add up”.

The leaders’ letter makes reference to the slow progress of this process, urging all G20 members to “move quickly” to “report robustly on what each of us can do to contribute to strong sustainable and balanced global growth”.

The letter also sounded a warning note over the so-called Doha round of global trade talks, which is at a virtual standstill after the collapse of negotiations in 2008.

“With regard to Doha, we need to determine whether we can achieve the greater level of ambition necessary to make an agreement feasible,” the letter said.

http://www.ft.com/cms/s/0/a1e38f96-3c23-11df-b40c-00144feabdc0,s01=1.html

Click Here to Download the G20 Letter