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
link to the original post:
http://www.atimes.com/atimes/China_Business/JL11Cb01.html
Fort Lauderdale Blog and Real Estate News
Rory Vanucchi
RoryVanucchi@gmail.com
http://waterfrontlife.blogspot.com
www.FortLauderdaleLiving.net
Showing posts with label china. Show all posts
Showing posts with label china. Show all posts
Dec 10, 2008
Dec 9, 2008
China plays beggar thy neighbor
By Peter Navarro
The latest summit between the United States and Chinese officials graphically illustrates that China has learned to play two games from the West: hardball and beggar thy neighbor.
China's hardball approach is evident in the announcement by its major sovereign wealth fund that it will no longer invest in the US financial sector.
The stated reason for this provocative announcement, which was issued on the very eve of the economic summit, is that any such investments would be too risky.
"I don't dare to invest in financial institutions now," Lou Jiwei, chairman of China Investment Corp, said at a conference in Hong
Kong. "The policies of the developed nations on these institutions are not clear. Until they are clear, I don't dare to invest in them. What if they go bust? I will lose everything."
In fact, China's new policy represents both retaliation and a bargaining chip. The retaliatory part of the hardball message has been aimed directly at US Treasury Secretary Henry Paulson, who, much to the displeasure of the Chinese, continues to repeat his demand for Chinese currency reform. The bargaining-chip part is designed to reinforce just how weak the US position is in negotiations while leaving open the door to future investments by China's sovereign wealth fund if the US behaves itself.
As for the beggar thy neighbor, it has become clear over the past week that Chinese government officials intend to export their way out of the global economic crisis. This is all too readily apparent in the recent downward movements of the Chinese yuan relative to the dollar. Stripped of any rhetoric, this movement represents a "competitive devaluation" designed to boost Chinese exports to the US at the expense of both domestic US manufacturers and competing countries such as South Korea and Japan.
In fact, Chinese currency manipulation represents "beggar thy neighbor" on a grand scale. By grossly undervaluing the Chinese yuan relative to the US dollar over the past five years, China has grown its economy on the backs of American workers and helped to decimate the American manufacturing base. Today, it is almost impossible for American manufacturers to compete against their Chinese counterparts when the yuan is undervalued by 30% or more. Add to this an extensive array of illegal Chinese export subsidies, and it becomes easy to understand how China has been able to offshore so many American jobs to its own factories.
Under political pressure, China allowed the yuan to modestly appreciate relative to the dollar over the past year. However, despite this appreciation, the yuan still fell relative to the euro and other major currencies - in the process, significantly exacerbating China's trade imbalance with Europe.
It's not just the United States and Europe that China's currency manipulation hurts. Japan, South Korea and others of China's erstwhile competitors in Asia for export markets likewise lose competitive advantage. That's why China's latest devaluation of its currency could not come at a worse time for its Asian neighbors.
South Korea is experiencing an horrific currency crisis of its own, one that is in large part driven by the steep decline in its exports and a collateral slowing of its economy. The last thing South Korea needs right now is a competitive devaluation by China that further negatively impacts South Korean exports and puts more downward pressure on the won.
Japan is in exactly the same boat. This is a country that just a year ago finally got its head above the economic waters but now is sinking back into the recessionary, deflationary morass. China's devaluation likewise strikes hard at the ability of Japan to bounce back.
The ultimate big picture here is that China could play a very constructive role in the rebuilding of the global economy. With its huge foreign reserves, it could assist Asian neighbors like South Korea in their time of need. China could also use this time as a transition point for moving from an export-driven economy to one fueled by domestic consumption.
It is all too clear, however, that China has chosen to move in the opposite direction. This will not only further destabilize the global economy. It will also significantly strain relations with the United States. This is particularly true given the campaign promise of president-elect Barack Obama to crack down on Chinese mercantilism.
Peter Navarro is a professor at the Paul Merage School of Business, University of California-Irvine, a CNBC contributor, and author of The Coming China Wars. www.peternavarro.com
(Copyright 2008 Peter Navarro.)
source: atimes.com
link to the original post:
http://www.atimes.com/atimes/China_Business/JL09Cb01.html
Fort Lauderdale Blog and Real Estate News
Rory Vanucchi
RoryVanucchi@gmail.com
http://waterfrontlife.blogspot.com
www.FortLauderdaleLiving.net
Dec 5, 2008
China's yuan set to reverse course
By Kosuke Takahashi
TOKYO - China, faced with factory closures and slowing export growth as the global economy slows, is apparently prepared to weaken the value of its currency against the US dollar in defiance of a key policy goal of the United States, even as US Treasury Secretary Henry Paulson visits Beijing this week.
A weaker yuan, which would signal an about-turn by Beijing after three years of appreciation, will help to hold down prices of China's exports, raising the likelihood of further increases in its already contentiously high trade surplus with the US. At the same time, a lower yuan will make imports to China from the US more expensive at a time when American workers are fast losing jobs
as factories there close on falling demand at home and abroad.
Paulson is expected to press for a stronger yuan in talks starting in Beijing on Thursday, just three days after the Chinese currency posted the biggest decline in value since the nation scrapped a fixed exchange rate in 2005.
The US initially welcomed China's July 2005 decision to remove the peg tying the value of the yuan to the US dollar and link the yuan instead to a vaguely defined basket of currencies. Pressure soon grew in Washington, however, for a faster rate of appreciation as the US trade deficit with China continued to mount, sucking ever-more dollars into the Chinese treasury.
A body of US legislators, notably Senators Lindsey Graham and Charles Schumer, and their supporters argue that China has maintained an artificially weak yuan to give its exports an unfair pricing edge in world markets.
China allowed the pace of yuan appreciation to increase during the first half of this year, under pressure from US and European countries. But the appreciation essentially stopped in July, followed by a sharp depreciation in recent days.
Paulson, who is in Beijing to take part in the fifth round of the so-called "Strategic Economic Dialogue (SED)" with China that he initiated in 2006, used previous such meeting to switch the focus of the gathering from the strength of the yuan to other issues.
As recently as December 2, Paulson said the Chinese had been "very responsible partners and stakeholders and have continued to stand by us and stand by our debt". The 20% appreciation of the yuan against the dollar since 2005 has been "important and significant".
The apparent reversal of the Chinese policy regarding appreciation now looks likely to put the yuan back to center stage in the Sino-US relationship, just when Paulson's authority is weakened as he prepares to leave office in January.
This week, the yuan continually hit the bottom of its permitted daily trading band, which extends 0.5% on either side of a midpoint. The yuan traded at 6.8838 to the US dollar as of 2.30 pm in Shanghai Thursday, after dropping as low as 6.8845 and down from 6.8830 on Wednesday. That put the currency near its lowest since June 17, according to the China Foreign Exchange Trade System. The currency hit a record high of 6.8099 on September 23.
The yuan may fall to 8.06 per dollar in one year, Lu Zhengwei, an economist at Industrial Bank Co in Shanghai, told Asia Times Online.
"This is the beginning of the yuan's depreciation," Lu said. "The yuan is set to reverse course. Its slump signals the central bank has changed its policy to one of support for a weaker currency. For developing countries such as China, economic growth prospects are most important. China's exporters are facing tremendous difficulties. A 10% depreciation would help more of them to survive."
Paulson's leverage on the issue is considered limited as China is already the biggest foreign holder of US Treasuries, surpassing Japan. In the event of a dispute, a strong move by China to reduce its Treasury and US corporate debt holdings could severely undermine already weakening global confidence in the US financial system. It would also threaten an end to the dollar standard system from which the US has benefited since the start of the 1944 Bretton Woods regime.
"There is widespread speculation Chinese authorities will change their stance toward the weaker yuan policy," said Masashi Kurabe, senior assistant general manager and head of trading group at global markets division for the East Asia Region at Bank of Tokyo-Mitsubishi UFJ Ltd in Hong Kong, a unit of Japan's largest publicly traded lender by market value. "So many local companies are in a rush to buy the dollar. And there are almost no sellers, excluding the central bank, because those sellers have no need to be in a rush to sell the dollar for the time being.''
The Chinese currency may move between 6.8 and 7 per dollar in six months on the spot market, Kurabe said. In the off-shore market, the non-deliverable forward rate of the yuan would fall further, he said, because of rising speculation over China's policy shift on the yuan, especially from early 2009.
The yuan may depreciate by more than 6% over the next 12 months according to Thursday's trade in non-deliverable forwards, which are used to bet on future yuan moves. That compares with a 2.6% depreciation indicated by trading last week.
"There has been a lot of attention this week on the recent sharp rise in the US dollar against the Chinese yuan, raising fears of yuan weakness going forward," Ashley Davies, a currency strategist at UBS AG in Singapore, wrote in a client note Wednesday.
"Actually, these developments are a logical extension of the [global financial] crisis, since slowing global growth reduces demand for Chinese exports and hence the need for Chinese intervention to stop rapid yuan appreciation. If the US wishes China to continue purchasing Treasuries, it will have to accept that the Chinese yuan will have to weaken," Davies said. "[T]he days of a combination of appreciating the Chinese yuan and large-scale purchases of [US] Treasuries by the Chinese may be over for now - something will have to give."
In September, China surpassed Japan to become the biggest foreign holder of US Treasury debt, with a total of $585 billion. China's $2 trillion in foreign-exchange reserves (the world's largest, followed by Japan's $1 trillion), are primarily invested in relatively low-yielding US government debt and the until recently considered safe debt of Fannie Mae and Freddie Mac, the two mortgage-finance companies taken over by the US government three months ago.
While speculation at present indicates the scale of any weakening of the yuan will be small, the global consequences of the policy u-turn could be considerable.
"The impact of China's currency devaluation should be very big," said C H Kwan, a senior fellow at the Nomura Institute of Capital Markets Research, a unit of Japan's largest brokerage. "It [could] lead to international competition by currency devaluation - a beggar-my-neighbor policy. It should be hard for China to do that. For China it should be a move of the last resort."
Competitive devaluations have been cited by some writers as a key cause of the Great Depression that started in 1929, leading eventually to the onset of World War II. The 1944 Bretton Woods agreements was originally set out a framework for financial stability that would reduce the likelihood for competitive devaluations and laid the foundations for the post-war economic expansion.
As recently as the 1997-98 Asia financial crisis, Beijing was widely praised for not cutting the value of the yuan as currencies elsewhere in the region tumbled.
Concern over a currency u-turn comes after China other efforts to boost its economy. Last week, Beijing cut the benchmark interest rate by the most in 11 years. It has also unveiled a 4 trillion yuan ($586 billion) stimulus plan to protect the economy from a global recession. China’s economy grew 9% from a year earlier, the slowest pace in five years, in the third quarter, as exports fell along with the global economic slump.
China's gross domestic product growth will slow to 8% in the present quarter from a year earlier, the State Information Center, a think-tank under the National Development and Reform Commission, said in a report published on November 27, the lowest quarterly growth since at least the fourth quarter of 2005.
"For developing countries like China, an 8% growth is not acceptable," Industrial Bank’s Lu said.
China's export growth cooled to 19.2% in October, the slowest pace in four months, prompting a pledge from Vice Premier Wang Qishan to "take all measures" to stabilize overseas shipments, Xinhua News Agency said on December 2. That could lead to a reversal in China's trade surplus.
"There is no such situation that China's trade surplus will keep ballooning, so the yuan may move around the current level of 6.8 per dollar in one year," Kwan said.
China's exports to the US increased 6.8%, to $250.4 billion, in the first nine months of 2008, compared with the same period a year earlier, according to US Commerce Department figures. US exports to China rose at more than double that pace, at 17.3% to $55 billion from January through September. That still left a $195.4 billion trade deficit that some lawmakers argue is hurting American manufacturers.
The US trade deficit with China widened in October to a monthly record $27.8 billion.
Kosuke Takahashi is a Tokyo-based journalist. He can be contacted at letters@kosuke.net
(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)
source: asia times
link to the original post:
http://www.atimes.com/atimes/China_Business/JL05Cb04.html
Fort Lauderdale Blog and Real Estate News
Rory Vanucchi
RoryVanucchi@gmail.com
http://waterfrontlife.blogspot.com/
www.FortLauderdaleLiving.net
TOKYO - China, faced with factory closures and slowing export growth as the global economy slows, is apparently prepared to weaken the value of its currency against the US dollar in defiance of a key policy goal of the United States, even as US Treasury Secretary Henry Paulson visits Beijing this week.
A weaker yuan, which would signal an about-turn by Beijing after three years of appreciation, will help to hold down prices of China's exports, raising the likelihood of further increases in its already contentiously high trade surplus with the US. At the same time, a lower yuan will make imports to China from the US more expensive at a time when American workers are fast losing jobs
as factories there close on falling demand at home and abroad.
Paulson is expected to press for a stronger yuan in talks starting in Beijing on Thursday, just three days after the Chinese currency posted the biggest decline in value since the nation scrapped a fixed exchange rate in 2005.
The US initially welcomed China's July 2005 decision to remove the peg tying the value of the yuan to the US dollar and link the yuan instead to a vaguely defined basket of currencies. Pressure soon grew in Washington, however, for a faster rate of appreciation as the US trade deficit with China continued to mount, sucking ever-more dollars into the Chinese treasury.
A body of US legislators, notably Senators Lindsey Graham and Charles Schumer, and their supporters argue that China has maintained an artificially weak yuan to give its exports an unfair pricing edge in world markets.
China allowed the pace of yuan appreciation to increase during the first half of this year, under pressure from US and European countries. But the appreciation essentially stopped in July, followed by a sharp depreciation in recent days.
Paulson, who is in Beijing to take part in the fifth round of the so-called "Strategic Economic Dialogue (SED)" with China that he initiated in 2006, used previous such meeting to switch the focus of the gathering from the strength of the yuan to other issues.
As recently as December 2, Paulson said the Chinese had been "very responsible partners and stakeholders and have continued to stand by us and stand by our debt". The 20% appreciation of the yuan against the dollar since 2005 has been "important and significant".
The apparent reversal of the Chinese policy regarding appreciation now looks likely to put the yuan back to center stage in the Sino-US relationship, just when Paulson's authority is weakened as he prepares to leave office in January.
This week, the yuan continually hit the bottom of its permitted daily trading band, which extends 0.5% on either side of a midpoint. The yuan traded at 6.8838 to the US dollar as of 2.30 pm in Shanghai Thursday, after dropping as low as 6.8845 and down from 6.8830 on Wednesday. That put the currency near its lowest since June 17, according to the China Foreign Exchange Trade System. The currency hit a record high of 6.8099 on September 23.
The yuan may fall to 8.06 per dollar in one year, Lu Zhengwei, an economist at Industrial Bank Co in Shanghai, told Asia Times Online.
"This is the beginning of the yuan's depreciation," Lu said. "The yuan is set to reverse course. Its slump signals the central bank has changed its policy to one of support for a weaker currency. For developing countries such as China, economic growth prospects are most important. China's exporters are facing tremendous difficulties. A 10% depreciation would help more of them to survive."
Paulson's leverage on the issue is considered limited as China is already the biggest foreign holder of US Treasuries, surpassing Japan. In the event of a dispute, a strong move by China to reduce its Treasury and US corporate debt holdings could severely undermine already weakening global confidence in the US financial system. It would also threaten an end to the dollar standard system from which the US has benefited since the start of the 1944 Bretton Woods regime.
"There is widespread speculation Chinese authorities will change their stance toward the weaker yuan policy," said Masashi Kurabe, senior assistant general manager and head of trading group at global markets division for the East Asia Region at Bank of Tokyo-Mitsubishi UFJ Ltd in Hong Kong, a unit of Japan's largest publicly traded lender by market value. "So many local companies are in a rush to buy the dollar. And there are almost no sellers, excluding the central bank, because those sellers have no need to be in a rush to sell the dollar for the time being.''
The Chinese currency may move between 6.8 and 7 per dollar in six months on the spot market, Kurabe said. In the off-shore market, the non-deliverable forward rate of the yuan would fall further, he said, because of rising speculation over China's policy shift on the yuan, especially from early 2009.
The yuan may depreciate by more than 6% over the next 12 months according to Thursday's trade in non-deliverable forwards, which are used to bet on future yuan moves. That compares with a 2.6% depreciation indicated by trading last week.
"There has been a lot of attention this week on the recent sharp rise in the US dollar against the Chinese yuan, raising fears of yuan weakness going forward," Ashley Davies, a currency strategist at UBS AG in Singapore, wrote in a client note Wednesday.
"Actually, these developments are a logical extension of the [global financial] crisis, since slowing global growth reduces demand for Chinese exports and hence the need for Chinese intervention to stop rapid yuan appreciation. If the US wishes China to continue purchasing Treasuries, it will have to accept that the Chinese yuan will have to weaken," Davies said. "[T]he days of a combination of appreciating the Chinese yuan and large-scale purchases of [US] Treasuries by the Chinese may be over for now - something will have to give."
In September, China surpassed Japan to become the biggest foreign holder of US Treasury debt, with a total of $585 billion. China's $2 trillion in foreign-exchange reserves (the world's largest, followed by Japan's $1 trillion), are primarily invested in relatively low-yielding US government debt and the until recently considered safe debt of Fannie Mae and Freddie Mac, the two mortgage-finance companies taken over by the US government three months ago.
While speculation at present indicates the scale of any weakening of the yuan will be small, the global consequences of the policy u-turn could be considerable.
"The impact of China's currency devaluation should be very big," said C H Kwan, a senior fellow at the Nomura Institute of Capital Markets Research, a unit of Japan's largest brokerage. "It [could] lead to international competition by currency devaluation - a beggar-my-neighbor policy. It should be hard for China to do that. For China it should be a move of the last resort."
Competitive devaluations have been cited by some writers as a key cause of the Great Depression that started in 1929, leading eventually to the onset of World War II. The 1944 Bretton Woods agreements was originally set out a framework for financial stability that would reduce the likelihood for competitive devaluations and laid the foundations for the post-war economic expansion.
As recently as the 1997-98 Asia financial crisis, Beijing was widely praised for not cutting the value of the yuan as currencies elsewhere in the region tumbled.
Concern over a currency u-turn comes after China other efforts to boost its economy. Last week, Beijing cut the benchmark interest rate by the most in 11 years. It has also unveiled a 4 trillion yuan ($586 billion) stimulus plan to protect the economy from a global recession. China’s economy grew 9% from a year earlier, the slowest pace in five years, in the third quarter, as exports fell along with the global economic slump.
China's gross domestic product growth will slow to 8% in the present quarter from a year earlier, the State Information Center, a think-tank under the National Development and Reform Commission, said in a report published on November 27, the lowest quarterly growth since at least the fourth quarter of 2005.
"For developing countries like China, an 8% growth is not acceptable," Industrial Bank’s Lu said.
China's export growth cooled to 19.2% in October, the slowest pace in four months, prompting a pledge from Vice Premier Wang Qishan to "take all measures" to stabilize overseas shipments, Xinhua News Agency said on December 2. That could lead to a reversal in China's trade surplus.
"There is no such situation that China's trade surplus will keep ballooning, so the yuan may move around the current level of 6.8 per dollar in one year," Kwan said.
China's exports to the US increased 6.8%, to $250.4 billion, in the first nine months of 2008, compared with the same period a year earlier, according to US Commerce Department figures. US exports to China rose at more than double that pace, at 17.3% to $55 billion from January through September. That still left a $195.4 billion trade deficit that some lawmakers argue is hurting American manufacturers.
The US trade deficit with China widened in October to a monthly record $27.8 billion.
Kosuke Takahashi is a Tokyo-based journalist. He can be contacted at letters@kosuke.net
(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)
source: asia times
link to the original post:
http://www.atimes.com/atimes/China_Business/JL05Cb04.html
Fort Lauderdale Blog and Real Estate News
Rory Vanucchi
RoryVanucchi@gmail.com
http://waterfrontlife.blogspot.com/
www.FortLauderdaleLiving.net
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