Asia-Pacific, Development & Aid, Economy & Trade, Headlines

FINANCE: Revalue Yuan and Get More Say at IMF, China Told

Antoaneta Bezlova

BEIJING, Sep 7 2006 (IPS) - The rise of China as a globally pivotal economy has encouraged a chorus of ever louder demands from other major economies that Chinese policymakers shoulder more responsibilities about the value and behaviour of their currency – the yuan.

The foreign camp, led by the United States, has offered China a greater share of voting power on the board of the International Monetary Fund (IMF)- all along a domain of developed economies, hoping that this new stature would play a double role as an incentive and pressure for Beijing to value upwards its currency.

At the annual meeting of the IMF, set to take place in Singapore later this month, financial leaders will vote on whether China, along with three other fast-growing economies – Mexico, South Korea and Turkey – should be given more say in setting policies on global economic matters, including how to deal with cases of currency manipulations by individual countries.

Many U.S. politicians see the ballooning bilateral trade deficit – 202 billion US dollars in 2005 and 24 percent higher than in 2004 – as proof that China keeps its currency artificially low, giving its domestic exporters an unfair advantage over U.S. business and causing American job losses.

They have repeatedly called for a sizeable upward adjustment of the Chinese yuan and urged the Bush administration – so far unsuccessfully – to designate China as a “currency manipulator” and impose trade sanctions.

But while Beijing is keen to boost its voting power at multilateral bodies to reflect the increasingly central role China is playing in the global economy today, Chinese policymakers are emphasizing there won’t be a trade off in regard to the currency issue.

In interviews and remarks in the run up to the IMF meeting on Sep. 11-20, top Chinese leaders and senior researchers have all stressed policy independence on the currency front. The currency’s movement will be determined by domestic priorities and not by international pressure, they say.

China should allow for currency flexibility but “firmly avoid appreciation of the yuan”, Wang Xiaogang, a senior researcher with the National Development and Reform Commission, the country’s top policy-making body, said this week.

“Given that industrialisation is not yet finished, and especially that our capital and technology-intensive industries are not competitive on the international markets yet, either gradual or rapid appreciation will add to uncertainty to the macro-economic environment and hurt the competitiveness of Chinese industries,” Wang commented in the official Shanghai Securities News.

In July 2005, China dropped the yuan’s decade-long peg to the U.S. dollar in favour of a link to a basket of currencies, which resulted in an immediate upwards revaluation of 2.1 percent.

This however, was not enough to satisfy politicians on Capital Hill who had demanded appreciation by 30 to 40 percent. Since then, the yuan has remained unusually stable, giving rise to accusations that the Chinese government is still influencing its value.

Defending its country’s currency record, Premier Wen Jiabao said this week the pace of the reforms would be set by Beijing. “We will continue to deepen reforms of the renminbi (the yuan) exchange rate mechanism but there will be no more ‘surprise adjustments’,” Wen told foreign media ahead of his upcoming visits to three European countries.

The Chinese government is worried that allowing the currency to appreciate too rapidly could risk the stability of the domestic economy, especially the large export-oriented sector, creating more unemployment and increasing social unrest.

The approach of the IMF meeting however, has fanned speculation that China might become more responsive to external pressure for appreciation of the yuan. The yuan set a post-revaluation high against the US dollar in the last two weeks, rising faster in August in comparison to the period between its de-link to the US currency last July and the end of last year.

But analysts say there could well be domestic reasons for the faster pace of appreciation allowed this summer as policymakers are using the currency mechanism as part of measures aimed at cooling China’s scorching economic growth.

In the first half of the year Chinese economy’s growth surpassed 10 percent despite the government’s talk of engineering a “soft landing”. While Beijing wants fast growth to create employment, it has become worried by the political problems with its trading partners, created by ballooning trade surpluses.

A stronger yuan would boost export prices and lower import costs, thus narrowing China’s trade surplus. But a stronger currency could hit hard on the most vulnerable – China’s hundreds of millions of farmers, driving them deeper into poverty by allowing a flood of imported agricultural products.

“They (Chinese policymakers) must carefully weigh the benefits of a much stronger renminbi – reigning in over investment and appeasing the U.S. Congress – with the costs,” argues Xu Sitao, an economist with the Economist Intelligence Unit Corporate Network.

While the U.S.has accused China of “economic nationalism” by intervening to keep its currency steady, the United Nation’s Conference on Trade and Development (UNCTAD) has endorsed it.

Mere economic reforms and deregulation promoted by multilateral bodies like the World Bank and IMF have failed to create enough growth and reduce poverty, UNCTAD said in its annual report, last week.

It called on developing countries to emulate China’s way of government intervention in the foreign exchange market, interest rates and capital flows as ways of strengthening their national economies.

The report said China’s growing domestic demand was playing a vital role for the growth in the developing world and warned that the process “must not be derailed”.

“Therefore renminbi (yuan) revaluation should continue gradually rather than abruptly,” it said.