Global banking giant HSBC yesterday threw its support behind China's policy of maintaining the yuan at current levels amid growing international pressure, especially from the US, that it revalue.
"It is the wrong time [to float the currency]," David Eldon, chairman of Hongkong and Shanghai Banking Corp (HSBC), said at the 2003 Forbes Global CEO Conference in Shanghai.
Commenting on the focal point of the ongoing controversy -- the pegging of the Chinese yuan in a tight band of around 8.28 yuan to the dollar -- Eldon urged caution.
Many economists and particularly US trade groups argue that the yuan is grossly undervalued and as a result Chinese exports are artificially competitive.
Eldon, however, called attention to the still fragile state of the global capital markets following the economic downturn of the past three years.
"You don't remove something when there is still some instability in the financial markets," he said.
Jospeh Stiglitz, the former chief economist and senior vice president of the World Bank, agreed, telling the conference that any move to revalue the currency now was "misguided."
Floating the yuan would expose it to the global capital markets, whose volatility "would impose enormous costs on the Chinese economy," he said.
Worse still, any float of the yuan "would also cause damage to the global economy."
Pressure from the US on China to float its currency was a by-product of Washington's fiscal and trade deficit, and was not Beijing's concern, he added.
"It is an American problem, not a Chinese problem."
Stiglitz, now professor of economics and finance at Columbia University in New York, said he is confident on the Chinese growth story.
There was "little evidence" of overheating in the economy, he said, noting that there is no evidence of any tightness in the labor market, while inflation is low and there is no large deficit.
China still has enormous capacity for future growth, driven by increasing productivity, he added.
"In the coming years, there is no reason to believe that China cannot continue to grow at the pace that it has done for the last few years," he said.
European Central Bank council member Ernst Welteke also said China shouldn't make "abrupt" changes to its decade-old dollar peg as the country's banks aren't equipped to cope with currency fluctuations.
"It makes no sense to pressure the Chinese government because China must first develop its banking system," Welteke said in a televised interview in Frankfurt. "One has to be careful to avoid abrupt changes."
US Secretary of the Treasury John Snow and US President George W. Bush, who is seeking re-election next year, are under pressure to take action from US companies who blame an artificially weak yuan for a record trade deficit with China and job losses. The US economy has shed 2.7 million jobs since Bush took office in January 2001.
"There's a lot of speculation that there will be an imminent policy change around the time of G7 meeting in Dubai this weekend, but it's way too early," said Clifford Tan, a Singapore-based director of Asian economics at Citigroup Inc.
In Washington, a group of US representatives will introduce a bill urging the Bush administration to "use all available means" to compel China to stop manipulating its currency to boost exports, said Rich Carter, a spokesman for Representative Donald Manzullo, an Illinois Republican and co-sponsor of the resolution. The House resolution also calls for trade sanctions against Japan, South Korea and Taiwan.
"There will be other things suggested by Congress -- raising tariffs, invoking trade laws or going to the World Trade Organization," said Mickey Kantor, who served as Commerce secretary and top trade representative in the Clinton administration. "We should be fairly blunt, resolute and focused with China to get them to trade in a way that is helpful to everyone, including themselves."
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