China defends yuan stance, keeps door open for change

BEIJING – Beijing stoutly defended its currency policy yesterday, denying it manipulates the yuan and rejecting the argument a stronger exchange rate would erase the US trade deficit with China.

At separate news briefings, a Foreign Ministry spokeswoman and two government economists held out the prospect of the yuan’s being allowed to resume its rise after a 20-month pause but said Beijing would proceed with caution and on its own terms. ‘We don’t want to see our exchange rate kept unchanged,’ said Zhang Yansheng, director-general of the Institute for International Economic Research, a think-tank under the National Development and Reform Commission, a powerful planning agency.China has repegged the yuan near 6,83 per dollar since July 2008 to help its exporters weather the global credit crunch. In the preceding three years it had let the yuan gradually climb 21 per cent against the dollar. US Treasury Secretary Tim Geithner said on Saturday his department would delay a report due by April 15 that could have labelled China a ‘currency manipulator’, a finding that would have been sure to draw China’s wrath.Zhang welcomed the announcement from Washington as ‘a good thing’, but said currency reform would take time.Making the yuan more flexible was a challenging task, not least because of a lack of hedging instruments in China and domestic companies’ lack of experience in handling a fluctuating exchange rate, the economist said.With US unemployment near 10 per cent, President Barack Obama is under pressure from Congress to persuade Beijing to allow the yuan to appreciate.US lawmakers contend the yuan, also known as the renminbi (RMB), is grossly undervalued, giving Chinese exporters an unfair advantage in global markets and destroying US jobs in the process.Jiang Yu, a Foreign Ministry spokeswoman, said China never manipulates the yuan and called for trade differences to be settled through dialogue.’The RMB exchange rate is not the main reason behind the U.S.-China trade deficit,’ Jiang told a regular briefing. ‘So naturally, RMB appreciation is not the solution to rebalance Sino-US trade.’Financial markets expect Beijing to permit the yuan to resume its rise some time this year in order to cap inflation and help promote domestic demand.The yuan rose in offshore forward markets yesterday as traders read the postponement of the ‘manipulation’ decision as a sign of an easing in bilateral tensions that could buy time for policymakers in Beijing to reach a consensus. The market is now pricing in a three per cent rise against the dollar in a year’s time. One possibility is that a renewed rise in the exchange rate will be accompanied by a widening of the yuan’s trading band, presented as an enhancement of China’s present currency regime.The yuan now may move no more than 0,5 per cent, up or down, from a central rate fixed every day by the central bank.Ba Shusong, deputy director-general of the Financial Research Institute, sketched out this scenario but said China should be very careful about the timing of any shift. Everything would depend on economic conditions in China and the United States.Ba, whose institute is part of the Development Research Centre, the Chinese cabinet’s think-tank, also said a rise in the yuan would not be decisive for the imbalance in trade between China and the United States.Indeed, Ba said the US deficit with China, which Washington put at US$227 billion last year, could even grow if the yuan strengthened – just as it did between mid-2005 and mid-2008 in spite of the yuan’s steady appreciation over that time. – Nampa-Reuters