US, EU Press for China Currency Revaluation

19 October 2011

Pressure is growing from the EU and US for China to loosen its strict control of its currency, particularly amid new reports of slowing Chinese trade growth. EU trade chief Karel de Gucht and US Treasury Secretary Timothy Geithner have lately reiterated the call for China to revalue the yuan - however, Chinese Premier Wen Jiabao has made clear in recent statements to Chinese media that his government would endeavour to keep the yuan stable.

Tensions have been building between the US and China over the currency issue since the Senate passed a bill on 11 October that targets countries that undervalue their currencies (see Bridges Weekly, 12 October 2011).

While the bill is unlikely to make it to the House floor due to opposition from House Republican leadership, the legislation has drawn fire from Chinese government officials that warn of a "trade war" should the bill eventually become law.

China has allowed the yuan to gradually rise since June 2010; it has risen seven percent against the dollar in that time period. However, US critics still argue that the yuan is highly undervalued, and allege that this acts as an export subsidy that makes Chinese exports cheaper than their foreign counterparts - which, some argue, leads to the loss of American jobs.

Treasury Secretary Geithner has been urging China to let the yuan appreciate more rapidly to benefit global growth, while at the same time cautioning that the US Congress should look into whether the US Senate's proposed currency legislation is consistent with the US' international commitments.

The US Treasury Department last week delayed a report on the exchange rate policies of its trading partners, including China. The report will come out after various international meetings are concluded, they announced, citing specifically last week's G-20 finance ministers meeting and the upcoming G-20 heads of state summit and Asia-Pacific Economic Cooperation Leaders' Meeting, both scheduled for November.

The US Treasury explained that this delay would give them the chance to "assess progress following several international meetings." The report is often delayed; the last one was due mid-April and released on 27 May.

EU Trade Commissioner De Gucht, speaking in Seoul last week, also called for greater discussion between Brussels and Beijing on currency policy. He explained that China's currency does not correctly reflect the economic situation in China.

Meanwhile, China's key G-20 negotiator Cui Tiankai told reporters in Seoul last week that China is doing its best to avoid a currency war - adding that this "requires efforts of all the G-20 members, not China alone." The recent appreciation of the yuan also has nothing to do with US pressure, Cui stressed.

Trade data shows slowing in Chinese exports

New trade data on the Chinese economy has further fuelled the currency discussion. The data shows a decrease in Chinese trade growth, appearing to confirm expectations of economic contraction outlined last month by China's Vice Commerce Minister Chen Jian at a high-level conference in Geneva, Switzerland (see Bridges Weekly, 28 September 2011).

Customs data now shows that the Chinese trade surplus in September narrowed for the second month in a row, this time to US$14.5 billion. Exports increased by their slowest pace in seven months in September: they expanded 17 percent from a year ago to just under US$17 billion, compared to 25 percent in August.

However, US Commerce Department estimates showed that the US trade deficit with China reached a record high in August of US$29 billion.

Currency issues arise at G-20 finance ministers gathering

The currency issue was also one of several topics under discussion at last week's meeting of the Group of 20 (G-20) finance ministers. According to Reuters, Chinese negotiators prevented the G-20 at the meeting from going beyond wording issued at their previous meeting in Washington on the need for emerging market economies' currencies to be more flexible (see Bridges Weekly, 28 September 2011).

Prior to the meeting, reports surfaced suggesting that there would be no G-20 progress on a stronger Chinese yuan. An unnamed G-20 official, speaking to Reuters before the meeting, explained that the EU had hoped China might agree to a plan for eventually making the yuan fully convertible, in the hopes of getting Beijing to agree on dates for such a move.

While Beijing has made clear that a loosening of its control of the yuan will occur in the medium term, there have been no details as to an actual timeline.

China will direct its efforts toward expansionary fiscal policy, specifically focused on boosting domestic consumption, the G-20 official added. China, in the Five Year Plan (FYP) passed in March of this year, is already pursuing a shift in economic development from export-orientation - a key factor in its growth strategy over the past three decades - to a pattern centred on domestic consumption.

China is also expected to keep its export policy and export-tax-rebate policy stable and increase its credit support for exporters, according to comments that Chinese Premier Wen made to Chinese media. Wen also noted that China will continue to push forward with currency reform.

The final language of the G20 finance ministers' and central bank governors' communiqué from the 14 to 15 October meetings in Paris outlined an action plan of co-ordinated policies for consideration at next month's leaders' summit in Cannes, France.

In the action plan, ministers urged that emerging market economies experiencing surpluses "accelerate the implementation of structural reforms to rebalance demand toward more domestic consumption, supported by continued efforts to move toward more market-determined exchange rate systems and achieve greater exchange rate flexibility to reflect economic fundamentals."

ICTSD reporting; "China leader ‘worried' by rising trade protectionism," AFP, 14 October 2011; "EU's De Gucht Says China Should Revalue Yuan Further," BLOOMBERG, 12 October 2011; "U.S. Delays Its Global Currency Report at a ‘Delicate Time' for China Ties," BLOOMBERG, 15 October 2011; "China's trade growth slows," FINANCIAL TIMES, 13 October 2011; "China trying to avoid currency war: G20 negotiator," REUTERS, 13 October 2011; "G20 tells euro zone to fix debt crisis in eight days," REUTERS, 15 October 2011; "No G20 progress seen on stronger Chinese yuan-G20 source," REUTERS, 14 October 2011; "Beijing to Keep Yuan Stable, Premier Says," WALL STREET JOURNAL, 17 October 2011.

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