Currency tensions to continue

08:21, October 12, 2010      

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Tensions over currencies are set to continue through the month running up to the Seoul G20 summit.

Officials and economists have said a stronger yuan is not a panacea for global imbalances, and too fast an appreciation may add uncertainty to the fragile global economic recovery.

China's foreign exchange policy was a central discussion point at the International Monetary Fund's annual meeting from Oct 8 until Oct 10. The United States took the lead in claiming that an "undervalued yuan" as the primary cause of global imbalances and in calling for a faster yuan revaluation.

However, People's Bank of China Governor Zhou Xiaochuan has made it clear that the country will gradually move toward a market-determined exchange rate system. He indicated the yuan could become stronger over time if China's economic development maintains its pace and inflation remains relatively low.

"China would like to use more gradual ways to realize a balance between domestic and external demand and there will be no shock therapy," Zhou said.

The country has in recent months accelerated the pace of yuan appreciation, with the currency trading at 6.6732 against the greenback on Monday, a record high since 1993. The currency has advanced 2.3 percent since mid-June, when the central bank scrapped the dollar peg and vowed to increase the flexibility of the yuan's value.

During a recent week-long visit to Europe, Premier Wen Jiabao warned that forcing China to revalue its currency might cause social unrest in the country and lead to "disaster for the world".

Chinese export companies have had very small profit margins, which could be wiped out by such actions as the currency import tariffs the US Congress is threatening to impose, Wen said.

A Ministry of Commerce survey showed the average profit margin of 2,000 key export-oriented enterprises across China had dropped to 1.77 percent in 2009, the lowest level in recent years. The findings underscored the challenging environment for Chinese exporters.

"Consumers across the world have been benefiting from buying Chinese goods at low costs," said Zhao Xijun, a finance professor at Renmin University of China.

"So it is not in their interest to see the Chinese economy losing steam," said Zhao.

The ongoing currency debate focuses on whether China, which has a high savings rate and strong export momentum, could contribute to the rebalancing of the world economy through adjusting its currency value. But many economists said a stronger yuan will not be a cure-all for global imbalances and cannot help resolve developed countries' structural problems.

"Yuan appreciation will not erase the US trade deficit with China, because the fundamental reasons for the US external imbalance are its high fiscal deficits and low household savings," said Fan Gang, head of the National Economic Research Institute and a former central bank advisor.

World Bank President Robert Zoellick said last week that yuan revaluation will not resolve all global imbalances, even though he agreed that a stronger yuan would be appropriate.

Zoellick also said that China needs to boost domestic demand and wean itself off export-led growth.

But the country cannot resolve global trade and financial imbalances on its own, and the US should take action too, he added.

Source:China Daily


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