Tue, Jul 22, 2003 - Page 11 News List

Yuan in hot seat at Dalian meeting

ECONOMIC SUMMIT China will face calls from Asian and European trade ministers to revalue the currency

BLOOMBERG

China may face new calls to let its currency rise when 25 trade ministers from Europe and Asia meet in its eastern port city of Dalian this week. Domestic economic priorities mean it's unlikely to budge, analysts say.

With millions of people seeking work and millions more at risk of losing their jobs as the economy shifts from state control to private enterprise, China needs a weak currency to keep exports flowing, raise household incomes and avoid political unrest, the analysts say.

That means it's likely to resist any early move to revalue the yuan's eight-year-old fixed exchange rate of 8.3 to the US dollar.

"China needs to peg its currency to maintain economic and political stability," said Michael Preiss, Hong Kong-based chief investment strategist at CFC Securities Ltd, a unit of Switzerland-based CFC Group.

"They need growth," Preiss said. "In the long term, it will happen, but for now it's business as usual."

Thanks to the peg, the yuan has tracked this year's 7.3 percent decline of the dollar against major currencies, making China's goods more competitive.

The three-day gathering that starts today in Dalian, officially focused on economic cooperation, may give China's trade partners a chance to convey their message directly. Those scheduled to attend include EU Trade Commissioner Pascal Lamy, French Trade Minister Francois Loos and the Philippines' Trade and Industry Secretary Manuel Roxas.

Several analysts, though, say there's little prospect that President Hu Jintao (胡錦濤) will make any big changes in currency policy soon.

The trade boost from a weakening currency, which makes Chinese goods less expensive abroad, helped Asia's second-biggest economy after Japan grow 8.2 percent in the first half, the most in any major nation. Exports contribute a fifth of its GDP.

China relies on trade "not only for growth but also for jobs," said Mike Moran, an economist in Hong Kong at Standard Chartered Bank.

"It's very difficult for international pressure to engineer a more flexible policy or stronger yuan in the near term," he said.

Other analysts point to China's falling domestic prices and the composition of its trade as additional reasons why its government won't bow to the drumbeat of international criticism.

China itself could be at risk of deflation: its consumer prices fell for 14 months until January, helped by price-slashing among companies seeking buyers for a glut of clothes, TVs and home appliances.

A stronger currency would make imports cheaper too, increasing the risk the world's most populous nation would succumb to the same kind of price and profit slumps that have afflicted Japan and Hong Kong.

Also overlooked, according to Qu Hongbin, HSBC Holding Plc's economist in Hong Kong, is the role of overseas investors in China's export gains.

"Granted, China's share of global exports has more than doubled to almost 5 percent in the last decade, but 75 percent of the rise is attributable to foreign companies' operations in China," Qu said.

"China can't ignore the demands of its trading partners," Fred Hu, Goldman Sachs Group Inc's China strategist in Hong Kong, said in an interview this month.

"The question is how China can move to a managed float," he said.

Before the Chinese government allows the currency to become fully convertible, it may let the yuan trade in a wider range, allowing it to move 2.5 percent above or below the pegged rate by the end of the year, he said.

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