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| It's China's move, again, on the yuan |
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The undervalued yuan is once again under scrutiny, now that it's obvious that the People's Bank of China's tiny revaluation has done little to make the currency trade more freely against the dollar. Since July 22, when the 2 percent appreciation in the yuan came into force, it has gained 0.2 percent against the dollar. In the same period, the British pound shot up 4.5 percent against the dollar, the euro climbed 1.3 percent and the Japanese yen rose 1 percent. Following the end of the yuan's peg to the dollar, traders expected the Chinese currency to be more flexible because the new rules allow it to fluctuate as much as 0.3 percent on either side of a daily fixing against the dollar. That flexibility has eluded the yuan. At 8.09 to the dollar, the most-populous country's currency is 3 percent weaker than where speculators expected it to be in a year if it traded freely. The political case for a stronger yuan also is regaining momentum. Commerce Ministry statistics released Monday showed that China had its third-highest trade surplus on record last month at $10 billion. A hint of the renewed diplomatic pressure on China to ease controls on the yuan came last week when, after pussyfooting for two years, finance ministers of the Asia Pacific Economic Cooperation forum, or APEC, finally gathered the courage to ask China to loosen its exchange rate. In a declaration last week in Jeju, South Korea, officials from the United States, Japan, China, and 18 other APEC nations, called for "greater exchange-rate flexibility for some economies as appropriate, supported by continued financial sector reform, in emerging Asia." That statement, radically different from what the ministers agreed upon last year, is a thinly veiled message to China. Meeting in Santiago, Chile, last September, the finance ministers were reluctant to offend China. They said that steps taken to develop capital markets and strengthen banking systems would "over time facilitate freer and more stable capital flows and a choice to move to an exchange rate regime with greater flexibility, in some economies, if they deem appropriate." Unlike the Santiago declaration, the language adopted in Jeju refers directly to emerging Asia, a euphemism for China. The Santiago statement also left authorities free to deal with currency flexibility at an unspecified time in the future, after they had cleared their banks of bad loans. By contrast, the Jeju declaration said that "continued financial sector reform" would "support" greater currency flexibility, with an implicit assumption that the two processes could be allowed to occur simultaneously. Clearly, that shortens the time frame for a stronger yuan. Back in 2004, the ministers had clung to a hard nationalistic position. The Santiago communication explicitly said that each country had a "choice" in deciding if it wanted a more flexible currency. That choice is no longer available. Sure, the word "appropriate" continues to figure in the APEC ministers' language, two years after Asian members pressed for its introduction in Phuket, Thailand, as a snub to John Snow, the U.S. Treasury secretary, who struck them as too strident in his calls for currency flexibility. However, the question of who's going to decide what is appropriate has been deliberately left out of the Jeju statement. What has emerged is the outline of a deal. If emerging Asia agrees to stronger currencies, the United States will pare its budget deficit and save more. Japan, the ministers' declaration said, would undertake "structural reforms," meaning the government would make efforts to revive banks, cut spending and dismantle barriers to competition in areas such as retailing. The APEC ministers' prescriptions for the United States and Japan have been borrowed, almost verbatim, from the declaration issued by the Group of 7 finance ministers in April. What makes the APEC statement unique is that China appears to have come on board on the issue of currency flexibility without hinting at preconditions, like cleaning up the Chinese banking system or full convertibility of the yuan, which would take years to fulfill. As for the deficit-reduction commitment made by the United States in Jeju, that's just a post-dated check, as Chinese authorities must realize only too well. It's no secret that the U.S. budget deficit will go up next year as the Gulf Coast, devastated by Hurricane Katrina, is rebuilt. So China may have to move first. The longer the yuan clings to the dollar, the greater the pressure on Beijing to revalue. By doing nothing, China risks being branded as a currency "manipulator," if not in the U.S. Treasury's October review of exchange rates then in the next one, six months later. Source www.iht.com Sep 13, 05 |
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