Saturday, March 27, 2010

367) Reevaluation of yuan: domestic demands...

Some economists, business leaders in China want yuan to appreciate
By John Pomfret
Washington Post, Saturday, March 27, 2010

BEIJING -- Chinese economists and business leaders have begun to call openly for their government to allow the yuan to appreciate against the dollar, in a sign that the issue is contentious here, too, and not just a problem between the United States and China.

President Obama has urged China to let the value of the yuan rise against the dollar as part of a plan to boost American exports and lower the trade deficit. U.S. economists have argued that the yuan is undervalued, and a group of senators led by Charles E. Schumer (D-N.Y.) is threatening to push legislation that would place tariffs on Chinese goods if China does not allow its currency to float more freely.

China's loudest public reaction has been negative. On March 14, Premier Wen Jiabao told reporters that the yuan was not undervalued. A week later, Chen Deming, the minister of commerce, repeated the message to a meeting of foreign businessmen and in an interview with The Washington Post. Chen's deputy, Zhong Shan, has taken a similar line during the past two days while visiting the United States.

All three officials implied that only the United States was pushing for the change, with Wen advising Washington to stop "finger-pointing." But it is becoming increasingly apparent that China's government is by no means united around that view.

The People's Bank of China and a slew of economic research institutes advocate a more flexible yuan policy to control inflation and bolster domestic consumption by making imports cheaper. On the other side, the Commerce Ministry, which represents exporters, wants to keep the yuan cheap to help its constituents send more products abroad.

On Wednesday, the People's Bank invited economists to a discussion of the issue in the run-up to the bank's regular quarterly meeting, scheduled for next week. Several economists who attended endorsed allowing the yuan to appreciate, participants said, to the apparent dismay of the Commerce Ministry officials there.

Xu Xiaonian, a professor at the China Europe International Business School, was one of those who argued for raising the currency's value.

"In my opinion, the yuan should appreciate as soon as possible," he said in an interview after the meeting, arguing that a higher yuan would help flatten inflation and force Chinese exporters to either increase their productivity or transition from cheaper to more technologically advanced products.

"Appreciation will force China's export industry to upgrade," he said. "The low-end enterprises should have been closed earlier."

But protecting exporters is exactly what the Commerce Ministry has been advocating. China's exporters could be hurt if the yuan strengthens, because it would make Chinese products more expensive overseas. In his interview with The Post, Chen, the commerce minister, revealed a critical figure: The profit margin of the average Chinese exporter is a thin 1.7 percent, and revaluation would wipe that out.

"We also have our own employment and stability to think about," Chen said.

Chinese business leaders have also weighed in, contradicting the Commerce Ministry. During the recent annual session of the National People's Congress, several chief executives of large Chinese companies spoke in favor of a revaluation.

Yang Yuanqing, chief executive of computer giant Lenovo, told an open discussion group during the legislative session that an appreciation could "not only ease the trade frictions with developed countries but also improve people's consumption capacity -- because when money is appreciated, people have more money to buy more stuff."

Some Chinese officials and economists said that pressure from the United States has complicated the debate in China because it has allowed opponents of appreciation to appear more patriotic. The U.S. Treasury Department is expected to decide by April 15 whether to label China a currency manipulator, which would significantly escalate the conflict between the two countries over the issue. Another reason for China's publicly tough face is its fear that any hint of plans for a revaluation would prompt speculators to pour money into the country, enlarging its sizable asset bubble.

Zhang Bin, a researcher at the Chinese Academy of Social Sciences, said he and his colleagues are concerned that the Commerce Ministry's view is the only one getting a hearing.

"Consumers in China have no voice on this issue," said Zhang, who backs a one-time 10 percent appreciation. "The voice of one side is overwhelming."

It is clear that despite official denials, China's government agencies and industry groups are preparing for an appreciation of some sort. In February, the China International Chamber of Commerce and the China Council for the Promotion of International Trade carried out "stress tests" to gauge the potential effect of such a move. Other ministries and industry groups have followed suit.

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