China Vague on Any Plan to Boost the Yuan

China, facing growing pressure from the United States, Europe and Japan to raise the value of its currency, is sending out a somewhat ambiguous response these days: Not yet.

For nearly a decade, China has firmly fixed its currency in relation to that of the U.S. at an exchange rate of about 8.28 Chinese yuan (known domestically as the renminbi, or “people’s money”) to one dollar.

As China’s economy has boomed, economists generally agree, its currency has become undervalued at that exchange rate. But Chinese leaders seem to like it that way, mainly because an undervalued yuan keeps China’s goods cheap and its export markets up, thus staving off the unemployment that would go along with a drop in world sales of Chinese-made products.

Other countries are complaining, though, and in recent weeks the volume seems to have been turned up several notches, especially in the United States. Both Federal Reserve Chairman Alan Greenspan and Treasury Secretary John W. Snow suggested recently that China should take steps to strengthen the yuan.

There are also signs that China’s monetary policy could intensify as a campaign issue heading into next year’s elections in the United States: A bipartisan group of U.S. senators recently called on Snow to investigate whether China was responsible for “significant job loss” in American manufacturing by keeping the yuan artificially low.

In response, China is rejecting the idea of letting the yuan float -- that is, allowing world financial markets to determine its value. China has offered signs that it may adjust the currency upwards, though presumably not as much as its critics demand, but has not set any timetable for doing so.

“We believe that a stable renminbi exchange rate is not only in the interest of China’s economic development but also in the interest of Asia and the world,” a Chinese Foreign Ministry spokesman, Kong Quan, said at a recent briefing for reporters in Beijing. He did say China would “improve the exchange rate mechanism,” an apparent indication of an upward revision, but he did not elaborate.

China’s exchange policy will be “determined first and foremost based on China’s own domestic economic needs,” Commerce Minister Lu Fuyuan said at a meeting of Asian and European trade ministers last week in Dalian. “It doesn’t mean we won’t adjust the yuan in the future.”

Following those comments, the powerful governor of the People’s Bank of China, Zhou Xiaochuan, essentially reiterated the country’s long-standing monetary policies in a speech this week. The central bank seeks to keep a tight lid on both exchange and interest rates in the country.

In another indication of Chinese resolve on the matter, British Prime Minister Tony Blair said that he had raised the issue of altering the fixed exchange rate in his meetings last week with Chinese President Hu Jintao and Premier Wen Jiabao, but that both men appeared “rather reluctant” to adjust the currency at this point.

China’s economy, the second-largest economy in Asia after Japan’s, is booming. The outbreak of SARS, or severe acute respiratory syndrome, much as it struck a deep psychological blow across the country and devastated tourism and some other industries, barely made a dent in manufacturing. The nation’s economy grew at a bit more than 8% in the first half of this year, a bigger rate than that of any industrialized country.

Given that strength, it might seem an opportune time for China to adjust the currency to make it stronger against the dollar, a move that would increase China’s own buying and investing powers internationally and ease tensions with the United States as well as Japan and Europe, where politicians have also grumbled about a cheap yuan.

“If China continues to maintain an undervalued currency, it will have a lot of trade conflicts with a lot of countries -- the leaders know that,” said Peter So, head of China research at ING Financial Markets, a large Dutch investment firm.

Yet, he said, Chinese leaders will probably resist calls to strengthen the yuan for perhaps as long as a year, unless they perceive the international pressure to do so to be too great.

The Chinese leaders certainly have internal reasons for keeping things the way they are with the yuan.

Even with the economy growing, some parts of the country are beset by double-digit unemployment. Any strengthening of the currency would make the country’s goods more expensive on world markets and almost surely take away jobs.

The rapid gains in productivity make delay in revaluation attractive to the leaders, So said. “They’re basically hoping that with the benefit of that higher productivity, they’ll be able to offset some of the problems that appreciation of the yuan would otherwise cause.” And China has one other reason for keeping its currency tied to the dollar: That strategy shielded it to a large degree during the financial turmoil of 1997 and 1998. In Thailand, Indonesia and several other Asian countries, whose currencies are freely traded, a spiral of downward trading caused widespread havoc.

To some degree, China has defused pressure from its neighbors by going on a bit of a regional spending spree.

“Their approach is to keep exporting like mad, but also importing like mad,” said Susan Shirk, a China expert in the Graduate School of International Relations and Pacific Studies at UC San Diego.

“What’s really the dramatic story in my mind is this [post-World Trade Organization accession] increase in Chinese imports, especially from Asia,” said Shirk, who was deputy assistant secretary of State for East Asian and Pacific affairs in the Clinton administration. “That reduces the international pressure on re-valuing the renminbi.”

But that is less true in the United States, where China still exports more than five times as much as it buys back in American-made goods ($124 billion versus $22 billion last year). Against this backdrop, it is clear that the undervalued yuan is a growing target of anger.

Treasury Secretary Snow testified on China’s currency practices to a Senate banking subcommittee Thursday. He said the administration will have no formal position on the issue until completing a report in October, but added: “I do have a firm view ... we should encourage them in the reports that they are looking at widening the band on the yuan,” a reference to the currently extremely narrow fluctuation (a fraction of a percentage point) that China allows in the yuan-dollar exchange rate.

Snow, touring Midwestern states earlier this week, heard a round of complaints from manufacturers about what they called unfair Chinese competition, and industry trade groups, such as the Coalition for a Sound Dollar, have urged the Bush administration to pressure China to revalue its currency.

Visiting a Harley-Davidson plant in suburban Milwaukee, Snow said he was “encouraged by the fact that the Chinese have indicated that they are looking at widening” the allowable fluctuation limits.

“That would be helpful,” added Snow, who said he was considering meeting Chinese officials later this year to address the exchange rate issue directly. “We want to engage the Chinese on this whole issue.”

Yet, treading a fine line, Snow warned against escalating the issue into a trade battle. “These are sovereign decisions,” he said later in the day.

“These are not decisions the United States can impose on anybody.”

U.S. officials’ understated-sounding comments nonetheless drew big attention in China and elsewhere in Asia.

Still, the Bush administration, seeking China’s help in trying to defuse the crisis over North Korea’s threatened nuclear weapons program, does not yet seem to have pushed the issue to the top of the agenda in U.S.-Chinese relations.