Yuan's slide no power game

Yuan's slide no power game
By Antoaneta Bezlova

BEIJING - Recent downward movements of the Chinese yuan have been interpreted in Beijing as political statements aimed at the incoming administration of US president-elect Barack Obama indicating that it should respect China's sovereignty rights on the currency issue.

Obama, when a candidate for the US presidency, accused China of keeping the value of its currency artificially low to protect the competitiveness of its export prices.

"Little concrete results can be expected to be achieved with a lame duck administration," said independent economist Xie Guozhong. "That is why Beijing chose this time to send a strong



signal to the incoming US administration that they need to be more considerate about China's needs to maintain its currency stable."

But there are signs that the yuan's sharp fall last week is more than just a salvo in a tense diplomatic exchange, and that, not unlike the US during the Great Depression, China is trying to export its way out of the economic crisis.

"China can go through its own version of the 1930s' Great Depression," argues Michael Pettis, professor of finance at Guanghua School of Management at Beijing University.

According to Pettis, Beijing's recent moves - increasing subsidies to exporters and halting appreciation of the yuan - bear similarities to the ways the US sought in the 1930s to export its problem of overcapacity.

Beijing exercises heavy control over the yuan's value. While most Asian currencies (except the Japanese yen) have fallen against the US dollar in recent months, the yuan has remained stable.

China gained considerable political credit from its decision during the 1997-8 Asian financial crisis to keep its currency stable and often reminds its neighbors of that effort. Nor have Chinese officials discouraged expectations that they would repeat this feat during the current economic crisis.

But then the Chinese yuan fell by its maximum daily trading limit of 0.5% against the US dollar for two consecutive days last week - the largest such change since China ended its effective peg to the US currency in the summer of 2005.

An editorial in the China Times newspaper was emphatic: "The currency move is a political signal aimed at the Obama administration not to exercise more pressure on China to revalue its currency.''

The sudden and steep fall of the yuan on December 1 came ahead of the latest round of biannual US-China strategic economic dialogue held in Beijing, where US Treasury Secretary Henry Paulson was expected by some economists to raise the heat on his hosts to speed up the appreciation of the Chinese currency.

China has been under immense pressure from its trade partners in the West to allow the yuan to appreciate and thus reduce its huge trade surplus. Over the past two years, China allowed the yuan to gain value relative to the dollar. That process has come at a high price, hitting Chinese exporters who were already struggling with rising costs and slumping global demand.

In mid-November, Zhou Xiaochuan, governor of the People's Bank of China, said that he could not rule out a depreciation of the yuan if the external environment remained tough for Chinese exporters.

His statement was followed by comments by President Hu Jintao that China was in danger of losing its completive edge in trade. Speaking to a regular study session of top Communist party officials, Hu warned that the economic crisis was testing the government's ability to steer the country through simultaneous global recession.

Several weeks ago Beijing announced a stimulus package of 4 trillion yuan (US$586 billion) in government and private-sector spending on public works and social programmes but little of that package is aimed at helping the collapsing exporters.

The yuan's drop came amid signs that the economic slowdown was hurting the country's exports more than had been previously envisaged. In southern China, where the main manufacturing hubs are based, hundreds of factories have gone bust, throwing thousands of workers on the streets.

November trade figures were expected to be released on Wednesday and experts anticipate export growth will be negative.
The Ministry of Commerce's latest trade outlook report warns of more closures amid plunging global growth rates. "The situation will get even more complicated, and there will be more uncertainties in 2009,'' the report said.

Exports have accounted in recent years for about one-third of the country's growth in gross domestic product. Beijing has been trying to shift gears and boost domestic consumption as the new driving force for growth but change has been slow.

In the days after the currency drop, speculation grew that Beijing was going to adopt a long-term weaker yuan policy to try and bail out its struggling exporters.

"There are still several leverages that the government could use to increase exports including the exchange rate," said Pei Changhong, a trade expert, in the "Blue Book of China's Economy", released by the China Academy of Social Sciences.

Commerce minister Chen Deming has rejected suggestions that the drop in the yuan was a deliberate government move to stabilize exports, saying it was due to "purely market forces".

The yuan's value has been a perennial bone of contention between China and its trade partners in the West, particularly the US, which says the low value of Chinese currency has allowed Beijing to grow its economy at the expense of competing countries' manufacturers.

China generates a huge trade surplus of goods and services, which last year accounted for 9% of its GDP. As more and more economies enter recession, Beijing's moves to use currency regime to ward off economic troubles are likely to raise protectionist hackles in more than one country.

"They [the Chinese] can't get away with increasing their trade surplus and exporting their over-capacity," says Pettis. "There would be a wave of anti-China sentiment around the world".

source: asia times

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http://www.atimes.com/atimes/China_Business/JL11Cb01.html


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