G7 Presses China To Free Up Yuan

Sydney Morning Herald

Friday June 10, 2005

Ashley Seager in London

China - already under pressure from the Bush Administration in the US to revalue its currency - will come under renewed fire at this weekend's Group of Seven meeting in London to ditch its fixed exchange-rate regime and allow the yuan to float freely on the foreign exchanges.

The country is causing panic among European manufacturers because Chinese-made clothes and shoes have flooded the European Union since import restrictions ended on January 1. It emerged yesterday that imports of Chinese-made shoes into the EU rose nearly 700 per cent in the first four months of this year.

Chinese Finance Minister Jin Renqing will attend a breakfast tomorrow with finance ministers of the G7 (Britain, Canada, France, Germany, Italy, Japan and the US) even though China is not a member. But the country's growing importance in the world economy - it will overtake Britain in size over the next year or so - means that it cannot be ignored.

It is far from clear that ear-bashing will force Mr Jin to change the yuan's 10-year-old fixed exchange rate of 8.3 to the US dollar. China considers the peg to be a domestic affair and many experts think that pressure from other countries to change or even abandon it could make the Chinese authorities simply dig their heels in further.

While Chinese officials have indicated that it would be desirable at some point to move to some sort of flexible currency rating, they have resisted intense pressure to announce an immediate revaluation of the yuan.

US Treasury Secretary John Snow has long said part of the reason that the US has such a huge trade deficit is that China is holding its currency artificially low by buying up huge quantities of dollar assets, and so making its exports artificially cheap.

Indeed, Mr Snow has given the Chinese a six-month deadline in which to revalue the yuan, also known as the renminbi. Failing that, the US Congress is preparing to slap tariffs on Chinese imports.

US Federal Reserve chief Alan Greenspan piled on the pressure on Tuesday, telling a conference in Beijing: "The issue of allowing flexibility in some form in the [renminbi] strikes me as very much to the advantage of China and indeed it is something that I am certain they will take on reasonably soon."

His opposite number at the People's Bank of China, Zhou Xiaochuan, played down expectations of any imminent move, saying it could only happen within wider economic reforms to ensure the country's economy could safely adjust to a floating currency. Political pressure from other countries would not help.

"This is not a favourable environment for China to put forward its reform and for its decision-making process," he said, adding that each stage of the reform process would be consulted on with different groups in the country.

Chinese Premier Wen Jiabao made the position crystal clear last month: "Reform of the renminbi's exchange rate is a matter of China's own sovereignty. Any pressure or media play-up will not help solve problems."

Nevertheless, financial markets across the globe are abuzz with speculation that the Chinese could be saying all this to keep any revaluation under wraps until it happens. Some economists expect some sort of change before Chinese President Hu Jintao attends the Group of Eight (G7 plus Russia) meeting in Gleneagles in early July. That could be a small revaluation linking the renminbi to a basket of currencies rather than just the dollar, or even a larger revaluation.

Janet Henry, senior global economist at HSBC, warns against great expectations of any move.

"Our assumption remains that the Chinese authorities will focus primarily on domestic financial reform, with only limited changes likely to the exchange rate regime in the coming months."

The most plausible options would be either changing to a peg against a basket of currencies or allowing a "crawling" peg against the dollar - altering the exchange rate periodically and gradually.

With the economy slowing, although still growing strongly, Chinese authorities will be keen to avoid a large revaluation, she said.

The Guardian

© 2005 Sydney Morning Herald

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