Print

Mail

wiki links

Editorial: Firms must be wary over yuan

Over the last two years, China's trading partners have been urging the country to stop linking its currency, the yuan, to the US dollar, complaining that it is intentionally keeping its currency artificially low to give Chinese companies an unfair advantage by making their goods cheaper abroad.

To buck international pressure, China has said that it would be willing to reform its foreign exchange rate system, as long as the economy is strong enough to withstand disruptions that may occur from an adjustment to its currency peg. The yuan has long been fixed at around 8.277 to the US dollar, with fluctuation permitted within a margin of 0.3 percent.

The mounting pressure, however, has shown no sign of stopping and became even more substantial last week. The US Treasury Department on Tuesday warned in a semi-annual report on foreign exchange rate policies that China could be cited as a "currency manipulator" and face economic sanctions, including a 27.5-percent across-the-board tariff on Chinese imports, unless Beijing moves swiftly to overhaul its currency policies in the next six months.

The US, which saw its trade deficit with China balloon to a record US$162 billion last year, called China's currency policies "highly distortionary" and warned in the report that such practices would pose a risk not only to China's trading partners but also to global economic growth.

Although a revalution of the yuan is unlikely to be a panacea for the US' trade balance illness, the pressure on Beijing comes during a tough time for China's political and economic planners.

For a country in which the GDP expanded 9.5 percent last year, and with US$659.1 billion in foreign exchange reserves at the end of March, Chinese planners may have to introduce flexibility to their currency, which economists estimate is undervalued by as much as 40 percent. But these planners are hesitant to do so, as they face serious problems such as widespread countryside poverty, rising unemployment and ailing financial markets.

Because of its overheating and unbalanced economy, China has been imposing more macroeconomic controls, but with little effect. China saw its economy grow an unexpectedly rapid 9.5 percent in the first three months of the year, which critics said was because the value of the yuan has remained unchanged.

In a move interpreted as preparation for an eventual yuan revaluation, China on Thursday decided to allow onshore trading of eight new foreign currency pairs.

In order to maintain its exchange rate stability, China's central bank would have to buy billions of US dollars from the market, which would sharply increase its foreign exchange reserves, adding further pressure for revaluation to the point where there is no more room for appreciation. But how long can China withstand such pressure, and what price is it willing to pay?

All of these factors should cause Taiwanese businesspeople to be more cautious when investing in China. A sudden change in China's exchange rate will deal a blow to all sectors, including Taiwanese businesses in China. A rising yuan would have a negative impact on those Taiwanese businesses that have operations in China and export goods to overseas markets. But for those Taiwanese businesses targeting the domestic Chinese market, a revaluation would likely mean lower prices for exports to China, stimulating consumption there.

The appreciating yuan and Chinese stocks' comparatively high price/earnings (P/E) ratios have caused an increasing number of Taiwanese companies to seek share sales on China's stock exchanges recently. But companies should stay alert to the mounting pressure and consider listing their shares in Hong Kong instead, as China still lacks adequate financial transparency and its exchanges suffer from poor trading rules.
This story has been viewed 2387 times.