Email
Print
ShareHong Kong: Even in good economic times, China's deliberate undervaluation of its currency, the renminbi (or yuan), invited criticism it was "stealing jobs" to keep its export competitiveness high. But the country's persistent exchange rate management even in grim economic times -- by pegging the yuan firmly to a weakening US dollar -- is proving even more controversial and raising renewed demands for it to revalue its currency.
On Sunday, China's commerce minister, Chen Deming, signalled that China was in no hurry to let its currency appreciate. Visiting the Canton Fair, the world's largest gathering of exporters, intermediaries and sourcers, Chen said, "The yuan's exchange rate will maintain basic stability, making the future situation predictable for our export industry and domestic manufacturers."
Economists reason that such a 'beggar-thy-neighbour' policy is compounding problems in parts of the world where despite a recent uptick, economic recovery remains weak. That's because a rebalancing of the world economy will be helped by a weaker dollar and higher savings in the West, stronger currencies in Asia and higher consumption.
"The big problem," says Standard Chartered chief economist Gerard Lyons, "is the continued recent stability of the Chinese yuan against the dollar." China's peg, he adds, "is forcing many Asian countries to fight to keep their currencies stable to maintain competitiveness, which, in turn, has led to the dollar weakening against floating currencies, particularly the euro."
Moody's Economy.com director Virendra Singh points out that this effect of China's policy is "causing heartburn in Europe and emerging markets." Other major currencies are appreciating against the dollar, he adds, and an effectively pegged Chinese yuan means these currencies are rising against the yuan as well. "This leaves exporters elsewhere fuming at what is really an insidious form of protectionism."
What compounds the problem, Singh notes, is that "the dollar is appreciating against the wrong currencies." Brazil, India, and the euro zone "do not have huge trade imbalances with the US; China does."
Global rebalancing requires the yuan to appreciate against the dollar, but "China seems to have made a strategic decision to wait until consumer demand in the West returns." In Singh's estimation, "Chinese policymakers may have calculated that they can then get back on the mercantilist train, revive exports, and return to the good old days. This is unlikely to happen."
Lyons reckons that there is an "overwhelming case for Asian countries to allow their currencies to appreciate," but acknowledges that "most will be reluctant to do so until they are confident in the recovery." This, he believes, leads to the problem of asset price inflation in many countries.
China, in particular, will benefit from a stronger yuan, argues Singh, since it will force its manufacturers to look inward for growth and accelerate a restructuring of domestic demand in favour of private consumption. "A growth strategy weighted in favour of investment and exports will leave the country vulnerable to external events and prone to overcapacity," he adds.
Yet, few economists see any sign that China will let its currency appreciate anytime soon. Chen's comment underscores that China's foreign exchange policy remains "micro-focused" and intent on stabilising the corporate sector's operating conditions, says RBS economist Ben Simpfendorfer. "It will take a stronger recovery in the export sector for the yuan appreciation to resume."
UBS economist Wang Tao, too, believes that although "economic fundamentals" put persistent appreciation pressure on the yuan, "given the domestic concerns, we don't think China will start appreciating the renminbi before export growth has turned positive for at least a few months."
