China balks at yuan change

Saleswoman Li Li stood in a booth
at the Canton trade fair, surrounded by luggage decorated with floral, leopard
and news headline prints like “credit crunch” and “economic disaster looms.”

She pointed to one that said
“dollar exchange rate” with a chuckle. “We’re all worried about the exchange
rate,” said Ms. Li, whose Globalway Luggage Co. is based in the eastern port
city of Ningbo.

“If the exchange rate changes, it
will really eat into our profits. It’s basic economics: our products will be
more expensive overseas and less competitive,” Ms. Li said.

After nearly two years of keeping
its currency stable against the U.S. dollar to help exporters like Ms. Li
weather the global financial crisis, hopes had revived overseas that Beijing
might relax the dollar peg soon. But as the European debt crisis deepens, China
is signaling it will hold back on any changes — a stance likely to complicate
high level talks with the U.S.

The latest, most authoritative
comment on that came from Commerce Minister Chen Deming, who told reporters
while visiting Austria this week that Beijing intends to keep the yuan stable.
Meanwhile, U.S. Treasury Secretary Timothy Geithner confirmed that the contentious
currency issue is bound to be on the agenda of his visit to China.

“I think it is, of course, China’s
decision about what to do with the exchange rate — they’re a sovereign
country,” Mr. Geithner said. “But I think it’s enormously in their interest to
move, over time, to let the exchange rate reflect market forces, and I’m
confident that they will do what’s in their interest,” he said while visiting
Boeing and other exporters in Washington state.

China reported a $196-billion
(U.S.) global trade surplus last year, adding to pressure to tilt its economy
toward greater reliance on domestic demand.

With the Greek debt crisis has come
a weaker euro, and a relatively stronger dollar-pegged yuan, “which should
reduce the volume of complaints from Brussels on Beijing’s exchange rate
policy,” said Tom Orlik, an analyst in Beijing for Stone & McCarthy
Research Associates.

Even if the euro’s drop to near
four-year lows against the dollar alleviates pressure from European trading
partners, President Barack Obama
has vowed to take a tougher line with Beijing over its controls on the yuan as
the U.S. heads toward crucial mid-term elections.

Opinions vary, but economists say
that depending on how it is measured the yuan is undervalued by up to 40 per
cent against the dollar. Fred Bergsten of the Peterson Institute for
International Economics estimates that bringing the yuan’s value up by that
amount could generate some 1.2 million U.S. jobs.

That would go a long way toward
meeting Mr. Obama’s recent pledge to create 2 million jobs, while doubling
exports over the next five years.

Chinese policymakers insist that
adjustments in the yuan’s value will have little direct impact on the trade
balance with the United States, and some fret that the yuan’s nearly 15 per
cent gain against the euro is already too great a burden.

“A revaluation would not bring any
good to our economy, as our exporters already are under heavy cost pressures.
It would be dangerous to revalue,” said Yi Xianrong, an economist at the
government-run Chinese Academy of Social Sciences in Beijing.

Yet, a growing number of Chinese
experts argue that Beijing does need to move faster on long-standing pledges to
loosen exchange rate controls, for the sake of its own economy. By clamping
down, they say, China is limiting its options at a time when the economy
appears on the brink of overheating, expanding nearly 12 per cent in
January-March while housing prices surged to record levels.

“A more flexible currency rate will
do good to both ourselves and the world economy,” said Mao Yushi, a prominent
reformist economist. “It is a difficult process though.”

Because of China’s large trade
surpluses, the central bank intervenes heavily in the exchange market, buying
up excess foreign exchange earnings to keep the yuan’s value from rising. This
has driven China’s foreign exchange reserves to a record $2.45-trillion while
pumping more money into the economy, pushing prices higher.

With China’s economy growing at
double-digit rates, boosted by $586-billion in stimulus spending and record
bank lending to finance construction projects, Beijing can afford to move
faster, some say.

Zhang Bin, an economist at the
government-run China Academy of Social Sciences, forecast that a 10 per cent
rise in the yuan’s value would cause a 3.3 per cent drop in exports. That would
pose no great threat, he said in a recent edition of the magazine Oriental

Not all American companies favour
pushing for a stronger yuan. Executives of multinationals with big operations
in China tend to favour keeping currency rates steady.

“The stable yuan is obviously
easier for managers to cope with,” said Kevin Wale, president and managing
director for General Motors China Group, which sources 85 per cent of its parts

For Pu Fangqiong, a purchasing
manager for a Shanghai textile exporter, a stronger yuan would be painful.

“The currency appreciation is only
a part of it. Pressure is coming from rising costs for raw materials and
labour,” she said. “We just hope it won’t get any worse.”

For many Chinese companies,
adjusting to a stronger yuan would involve trying to climb the “value chain” to
produce more expensive products or by selling more inside China.

“The answer is to try to sell more
to the domestic market. The yuan’s appreciation is inevitable and you cannot
survive unless you are well prepared,” said Zhang Yizheng, general manager of
auto parts trader Shanghai Ruisheng Industrial Trade Co.

The company has benefited from
China’s surging auto sales. But for most exporters, going local is tough given
the fierce competition from both Chinese and foreign companies fighting for a
piece of the only booming major market around.

“We want to have our own label and
create our own unique products, but that’s hard to do,” said Wang Zhansheng,
whose Beijing-based company, China Tong Yuan Co., makes tote bags and purses
for export.

“You have to take customers out to
lots of dinners and sometimes even pay bribes to get an order,” he said.