G-7 pushes China on the yuan - Business Asia by Bloomberg - International Herald Tribune

G-7 pushes China on the yuan - Business Asia by Bloomberg - International Herald Tribune

G-7 pushes China on the yuan
By Gonzalo Vina and Simon Kennedy Bloomberg News
MONDAY, DECEMBER 5, 2005

LONDON Finance ministers and central bankers from the Group of 7 pushed China over the weekend to make its currency more flexible, expressing disappointment with steps taken so far.

"We expect that further implementation of China's currency system would improve the functioning and stability of the global economy and the international monetary system," the officials, who oversee two-thirds of the world economy, said in a statement released on Saturday after two days of talks in London. "Exchange rates should reflect economic fundamentals. We continue to monitor exchange markets closely and cooperate as appropriate."

China's yuan has appreciated 0.4 percent since July 21, when Beijing replaced a decade-long peg to the dollar with a basket of currencies and allowed its exchange rate to increase by 2.1 percent. The country's major trading partners say that the revaluation is not enough and argue that more is needed to help cut a record U.S. trade gap and aid economic growth in Europe and Japan.

Japan's finance minister, Sadakazu Tanigaki, told reporters: "We believe China needs some time to get accustomed to their new currency regime, but a considerable time has already passed. I expect China to make its currency a little bit more flexible."

The G-7 officials were tougher on China than at their last meeting in September, when they granted it some breathing room by calling its new currency regime "welcome." Since September 2003, the G-7 has pushed Asian nations to adopt more-flexible currencies to help balance the world economy.

"Global imbalances also very much involve China and emerging Asian economies," the U.S. Treasury secretary, John Snow, said after the talks.

Lawmakers and manufacturers outside China say an undervalued yuan gives Chinese exporters an advantage, contributing to a record trade deficit in the U.S., slow expansions in Japan and Europe, and job losses in all three.

China's finance minister, Jin Renqing, declined to comment on exchange rates on Saturday after he met with his G-7 counterparts. "We exchanged views on the world economy," he said.

In its statement, the G-7 said that the world economy "remains and should continue to be solid" but added that high oil prices and global economic imbalances remain risks to expansion.

The G-7 said "more vigorous, mutually reinforcing action" was needed to help sustain economic growth. Gordon Brown, the chancellor of the British Exchequer, who led the talks, said ministers had already shown "a determination" to deal with problems like the threat of inflation.

Separately, Toshihiko Fukui, governor of the Bank of Japan, told his G-7 counterparts that the bank would eventually end its deflation-fighting policy as price declines came to an end and the economy kept expanding.

"We will confirm that consumer prices will stabilize at zero or above before taking action." Fukui said at a news conference in London.

He also said the recent weakening of the yen was "not a problem" for policy makers.

Commentary: The G-7 holds its tongue in deference to China - Print Version - International Herald Tribune

Commentary: The G-7 holds its tongue in deference to China
By Andy Mukherjee Bloomberg News
TUESDAY, DECEMBER 6, 2005


Three months ago, finance ministers from the Group of 7 wealthy industrialized nations were optimistic that China's new currency regime would help the global economy recover its balance. Last weekend, they weren't so sure.

Consider the following two G-7 statements:

"We expect the development of this more market-oriented system to improve the functioning and stability of the global economy and the international monetary system." (Washington, Sept. 23, 2005)

"We expect that further flexible implementation of China's currency system would improve the functioning and stability of the global economy and the international monetary system." (London, Dec. 3, 2005)

Notice how the G-7's London declaration has dispensed with the confidence the ministers expressed in Washington in "this more market-oriented system."

Notice also that the ministers, having lost their early enthusiasm for the yuan's move in July to a "basket peg," have coined a rather gauche phrase - "further flexible implementation of China's currency system" - to exhort authorities in Beijing to do more.


The expression "flexible implementation" is more than just awkward; it's misdirected. It seems to suggest that the G-7 is happy with China setting the timetable for greater variability in its exchange rate. Just the opposite is true.


Rather than allowing Beijing the luxury of setting its own pace, what the group of industrial nations wants is for the yuan to trade more flexibly - from tomorrow morning if possible.

The thinking is that when the U.S. economy and currency come under strain next year, as some economists expect them to, China should do its bit for readjustment of the global current-account imbalance. That would mark a shift from the previous episode of dollar weakness between 2002 and 2004, when Europe - and to a lesser extent Japan - bore the pain of stronger currencies. The yuan followed the dollar down in that period.

The G-7 now understands that the adoption of the so-called basket peg was a political gesture, not a policy change.

As economists like Jonathan Anderson at UBS have said for some time, the yuan is still being managed bilaterally against the dollar.

From July 22, when it was revalued at 8.11 to the dollar, the yuan has tightly hugged the U.S. currency, just what you would expect from "a re-peg wrapped in lots of rhetoric about flexibility," as the Oxford University economist Brad Setser terms China's new currency regime.

A stronger yuan may contain the surge in China's trade surplus, which jumped sevenfold to $80 billion in the first 10 months of 2005. That will curb the world economy's overdependence on U.S. consumption funded by Chinese savings.


One reason the G-7 statement came out all muddled is that the ministers were walking a tightrope.


The U.S. Treasury secretary, John Snow, and his colleagues knew that their London statement was their most explicit appeal yet for change in the Chinese currency policy since they first started making broad hints on the subject at their meeting in Dubai in 2003.

Since the substance of their message is substantially provocative, they could not allow the tone of their statement to be offensive. That would only anger China and delay any currency moves that might already be in the works in Beijing.

The Group of 7's latest language, says Sabrina Jacobs, a currency strategist at Dresdner Kleinwort Wasserstein in Singapore, "is mild, not pushy, combining modest pressure with politeness, suggesting that the major developed nations have finally acknowledged that adopting a more cordial stance toward the Middle Kingdom promises a higher rate of success."


Unless the authorities in Beijing make another currency move by March, there will be pressure on the Bush administration from Senators Charles Schumer and Lindsey Graham to impose punitive tariffs of 27.5 percent on U.S. imports from China.


Battling diplomatic pressures is only half of China's job. It also needs to damp the market's expectations of a stronger yuan before the continued deluge of capital inflows into China makes that a self-fulfilling prophecy.

Anderson, the UBS economist, said that Chinese efforts to quell speculation were evident in the People's Bank of China's recent currency swap, in which the central bank agreed to sell $6 billion worth of yuan in 12 months to domestic lenders at an implied one-year appreciation of 3 percent to the dollar.

As the contours of that deal became known, the nondeliverable forward market, which was expecting the yuan to be stronger than 7.85 in one year, was forced to shed some of its enthusiasm.

There is every reason to expect that China will aim to hold on to the dollar as tightly as it can in 2006, even as the United States - and the G-7 - try their best to break the embrace.

After the G-7's clumsy statement, one wonders if China may not have an upper hand in the contest.

The Future of the Dollar - Newsweek: International Editions - MSNBC.com

The Future of the Dollar - Newsweek: International Editions - MSNBC.com

MSNBC.com

The Future of the Dollar
Jumping up is not likelynot with that debt burden.

By Stephen Glain
Newsweek International


Dec. 26, 2005 - Jan 2, 2006 issue - The smart money is betting, once again, that the days of the almighty dollar are numbered. And just because this prediction was startlingly wrong for 2005 doesn't mean it's wrong again for 2006.

After a yearlong bull run fed by rising U.S. interest rates, political disarray in the euro zone and sustained dollar buying by Asian central banks, the dollar is running out of fuel, say economists and investors. The latest warning shot came when the European Central Bank, led by president Jean-Claude Trichet, earlier this month raised its basic interest rate for the first time in 30 months, a move that could attract investors to the euro. After the first quarter of 2006 "things get dicier" for the dollar, says Anton Pil, global head of fixed income for JP Morgan Private Bank. "You'll start seeing the unwinding of dollar positions back into euros and yen... and then the debt cloud will re-enter the picture."

Over the last year, the dollar rose about 15 percent against the euro and yen. That defied virtually all forecasters, who thought America's growing debts would chase investors away from the dollar, and occurred despite a continuing run of news that, in theory, should have depressed the currency: the troubles in Iraq, record-high oil prices and hurricanes on the Gulf Coast.

How could that happen? Even as America's trade deficit continued to swell, hitting a record $66 billion in September, concern about its potentially harmful effects was muted by generally strong and inflation-free economic growth. Meanwhile, the Fed was gradually making the dollar more attractive by raising rates in quarter-point steps, or a total of 1.75 percentage points over the year, to 4 percent. This steadied the nerves of investors who "carry" dollars and dollar-based assets in short- to midterm trades for the higher returns they offer, compared with what's available in slow-growth Europe and Japan. In a move not widely noted outside financial circles, the Bush administration also dramatically cut taxes on profits remitted to the United States, from 35 percent to 5.5 percent. That added further stimulus to the dollar at a time when political chaos in Europe, from race riots in Paris and France's rejection of the EU constitution to the inconclusive outcome of elections in Germany, was undermining the euro.

Asian central banks, which sell their own currencies for dollars to enhance their export competitiveness and account for more than half of the world's $2.5 trillion in foreign reserves, continued to be loyal dollar buyers. The fright that rattled exchange markets in February, when South Korea's central bank implied it was switching out of dollar-based assets, proved ephemeral. "It seemed market forces should have put downward pressure on the dollar," says Jared Bernstein, an economist at the Economic Policy Institute, "but that hasn't happened because Asian governments in general and China in particular are so heavily invested in that product."

American manufacturers who compete with Asian exporters say such a store of dollars amounts to currency manipulation, and have agitated for the White House to take action. They were disappointed last month when the U.S. Treasury Department refused to cite Asia's second largest dollar buyer, China, for any misdeeds. Lawmakers howled in protest, and threatened to unveil a bill that would slap punitive tariffs on Chinese-made imports. But they look unlikely to get such a bill past the White House.

Absent stiff pressure from Washington, say industrialists and lawmakers, China will continue to buy enough dollars to keep the dollar on its current upward slope. That's absent any countervailing force, however, and economists say they expect one in the form of higher interest rates within the next six months or so. Higher rates would draw traders to non-dollar-based investments, such as European and Japanese equities and bonds. The consensus seems to be for a slight shift in direction: JP Morgan's Pil anticipates one euro will be worth $1.20 by mid-2006, up from $1.17 today, while a dollar will buy only 115 yen, down from 120.

If the unexpected rise of the dollar in 2005 helped dampen concern about America's budget and trade deficits, even a slow slide could revive the debate. Growing pressure on Congressthe National Association of Manufacturers says the dollar must weaken at least an additional 12 percentcombined with rising energy prices, Gulf Coast rebuilding costs and the growing toll of the Iraq war could tip the balance in favor of dollar hawks. The irony is that if the hawks successfully pressure China to revalue, that would reduce Chinese demand for dollars, perhaps precipitating a sudden collapse in the U.S. currency, which no one wants. "We're always thinking in the back of our mind, 'Could the dollar crash?' " says Bernstein. "That's the nightmarethat China stops buying our assets. But it's hard to imagine a steep selloff, barring unforeseen circumstances." Let's hope the consensus forecasters are right this time.

© 2005 Newsweek, Inc.

© 2005 MSNBC.com

URL: http://www.msnbc.msn.com/id/10513234/site/newsweek/

People's Daily Online -- Yuan to revalue or to reform? Central bank official affirms the latter

Home >> Business
UPDATED: 08:42, December 26, 2005
Yuan to revalue or to reform? Central bank official affirms the latter



Yuan has been a top dancer drawing eyeballs from fund clubs to kabob stand tables. Rumors are cooking and speculations mushrooming while he said the key to the Chinese currency lies on reform.

"Flexibility and fluctuation are the 'key words,' instead of revaluation," he, a central bank official related, told Xinhua Friday on condition of anonymity.

China on July 21 reset the yuan's value at 8.11 to the dollar, a 2.1 percent appreciation from the pegged level where it had been held since 1995, and started managing its value against a basket of currencies including the euro and yen.

The yuan has since fluctuated some 400 base points, closing at 8.0775 to the dollar Thursday, up 325 base points from July 21.

"400 is a lot," he said, "and the next is to improve the market mechanism."

A recent central bank meeting on monetary policies reiterated that efforts should be made to let market supply and demand play a "fundamental" role in the determination of yuan's value, and speed up the development of domestic foreign exchange market.

A new mechanism should be built to allow market forces to set the currency's value, said a report issued after the meeting.

The central bank official interviewed by Xinhua said, "The point is that traders are expected to learn and take the foreign exchange fluctuation risks, financial institutions to provide more risk-control products especially derivative services, and the State Administration of Foreign Exchange (SAFE) to follow suit."

The People's Banks of China (PBoC), or the central bank, has stated it would widen the yuan floating band "at a proper time," and now China is letting the currency rise or fall by 0.3 percent a day against the U.S. dollar and a maximum of 3 percent against the euro and the yen.

Industry insiders speculate that the central bank may widen the yuan's fluctuation range against the U.S. dollar, for example, to 3 percent, the Shanghai Securities News reported.

"The timetable (of yuan reform) depends on the firms' endurability, the market's maturity and the regulator's ability," the central bank official said, however. "Therefore, China will take a 'walk-and-see' position instead of making any great leap forward."

He warned that the yuan, although witnessing ups twice as much as downs in trading days over the past five months, could go in another way -- to depreciate.

"The more foreign currencies come in, the more pressure on depreciation will be seen," he explained.

China's trade surplus swelled more than sevenfold to 80.4 billion U.S. dollars in the first 10 months of this year, rocketing from 11.1 billion dollars a year earlier.

Some developed countries, typically the United States, have been arguing that the yuan is too low in value, giving Chinese exporters an "unfair" advantage in trading activities and hurting job markets in other countries.

Although a report released by the U.S. commerce department in November admitted currency manipulation does not exist in China, some parliament members are still pressing China in this area.

"China began to consider the yuan reform as early as in 2001. Actually, it was the international speculation and pressure that delayed the process," the central bank said.

"Our foreign exchange reform is market-oriented and China will do it in an independent, controllable and progressive way without bowing to pressure from outside."

Source: Xinhua

U.S. Declines a Chance to Criticize Yuan Policy - New York Times

November 29, 2005
U.S. Declines a Chance to Criticize Yuan Policy
By EDMUND L. ANDREWS
WASHINGTON, Nov. 28 - Six months ago, the Bush administration warned that it would accuse China of currency manipulation if it failed to make substantial changes to its fixed peg between the yuan and the dollar.

In July, China allowed the yuan to rise by 2 percent, the first change in more than 10 years, but it has not budged since.

On Monday, the Treasury Department once again held its tongue. Instead of accusing China of currency manipulation, it expressed disappointment that trading in the yuan is "highly constricted" and said it would "intensely scrutinize" its practices in future reports.

The statement was included in a report issued by the department every six months on the currency policies of the nation's trading partners.

It provoked an angry reaction from American manufacturers, some lawmakers and outside trade analysts who have argued for years that China has deliberately undervalued its currency to make its exports cheaper in world markets.

"We've seen this movie before," said Frank Vargo, senior vice president for international affairs at the National Association of Manufacturers. "What Treasury is saying is pretty much of a rerun of what it said back in May."

In Congress, two leading critics of China quietly renewed threats to seek legislation that would impose steep tariffs on Chinese imports if the yuan was not allowed to float more freely.

"The Chinese manipulate their currency, and the administration should not have ducked the issue," said one, Senator Charles E. Schumer, Democrat of New York. "Their refusal to acknowledge reality and take the necessary corrective actions hurts every American."

Mr. Schumer and Senator Lindsey Graham, Republican of South Carolina, have been co-sponsors of a bill that would impose tariffs of 27.5 percent on Chinese imports. This month, the two lawmakers agreed to defer a vote on their bill but left open the option of demanding a vote as early as December.

China's trade surplus with the United States has continued to balloon in 2005 and is expected to approach a record $200 billion, bigger than the United States trade imbalance with any other nation, including Japan and the entire European Union.

The trade imbalance is all but certain to widen even more next year. China's exports to the United States are six times its imports, meaning that American exports to China would have to climb at six times the rate of imports just to keep the trade balance at current levels.

To keep its currency from rising in value, China's central bank continues to buy up United States debt and has acquired hundreds of billions of dollars in Treasury securities.

"It's a big mistake not to label China if the U.S. law has any meaning," said C. Fred Bergsten, director of the Institute for International Economics, a research group in Washington. "They are still intervening massively to keep their currency from rising. I don't see how you can not define that as manipulation."

Most analysts agree that the yuan is undervalued and would rise if China allowed it to float more freely. That makes Chinese exports cheaper for people paying in dollars, though it is far from clear that a higher value for the yuan would offset China's huge cost advantage in cheap labor.

Treasury Secretary John W. Snow has spent the last two years trying to persuade China that flexible exchange rates are in its own interest.

Branding China a "currency manipulator" would be largely symbolic, but it would be the first time in 11 years that the United States has made such a charge and would represent a much more confrontational approach.

Greater pressure on China could come from Congress. In a vote that stunned the White House as well as Chinese officials, the Senate voted 67 to 33 against squelching a floor vote on the Schumer-Graham bill. That bill would impose tariffs of 27.5 percent if China failed to let its exchange rate reflect market forces.

To postpone an immediate vote last spring, Senate Republican leaders promised Mr. Schumer and Mr. Graham that they would be given a chance to bring their measure up later this year. Mr. Schumer said he had not decided whether to seek a vote as early as December, but an aide said that "everything is on the table."

Administration officials flatly oppose such legislation, saying it would jeopardize trade and hurt consumers. Instead, they once again stressed their desire to let Chinese leaders make good on their repeated vow of moving toward a floating exchange rate.

"We're going to give them the benefit of the doubt that they will do what they say they are going to do," said Timothy D. Adams, under secretary of the Treasury for international affairs. "We would just urge them to undertake a quicker pace of reform."

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