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China's top leaders walk to the opening meeting of the National People's Congress, the country's parliament, at the Great Hall of the People, Beijing, March 03, 2010. Photo: Xinhua
On Saturday, People's Bank of China governor, Zhou Xiaochuan, hinted that China will eventually end the fixed link of its currency, the renminbi/yuan with the US dollar, which he termed as a temporary response to the global financial crisis. But he signalled that change will not come soon. Meanwhile, a commentary published by the State news agency, Xinhua, says think again - - this may not be China's century.
China had left its currency slowly appreciate about 20 per cent from mid-2005 after ending a peg to the US dollar. It then fixed the rate at 6.83 yuan to the dollar in July 2008 to assist exporters and estimates of overvaluation have ranged up to 40 per cent. In April, the US Treasury has to prepare a report on currencies for the US Congress in which it could term China a 'currency manipulator' a move that could trigger a complaint to the World Trade Organization and possible sanctions on Chinese imports.
The Obama administration has been patient on the issue up to know as China's massive RMB4 trillion ($585 billion) stimulus spending was seen as important for the recovery. However, in early February, in response to a question from Senator Arlen Specter on "China violating international law with subsidies and dumping," which he termed "a form of international banditry," President Obama said he would not be in favour of revoking the trade relationships that have been established with China. "I have shown myself during the course of this year more than willing to enforce our trade agreements in a much more serious way," he said.
"I also believe that our future is going to be tied up with our ability to sell products all around the world, and China is going to be one of our biggest markets, and Asia is going to be one of our biggest markets. And for us to close ourselves off from that market would be a mistake," he said and added "One of the challenges that we've got to address internationally is currency rates and how they match up to make sure that our goods are not artificially inflated in price and their goods are artificially deflated in price. That puts us at a huge competitive disadvantage."
In 2009, the US trade deficit with China was $227 billion, down 15 per cent from 2008 but up from $84 billion in 2000 and $83 billion in 2001. The EU27 trade deficit with China increased significantly to €169 billion in 2008 - - the highest ever. The deficit with the EU was €123 billion in the 11 months to November 2009.
Gov. Zhou Xiaochuan comments on the currency were made at a press conference during the annual session of China's parliament, the National People's Congress (NPC).
Zhou said the current policy, which has kept the yuan's value fixed, was a "special measure" adopted in unusual circumstances. "This is a part of our package of policies for dealing with the global financial crisis," he said, adding:"These kinds of policies sooner or later will be withdrawn."
Zhang Ping, Chairman of National Development and Reform Commission (NDRC), Xie Xuren, the Minister of Finance, Chen Deming, the Minister of Commerce, and Zhou Xiaochuan, governor of the People's Bank of China, attend a news conference of the Third Session of the 11th National People's Congress (NPC) at the Great Hall of the People, Beijing, March 06, 2010. Photo: Xinhua
On Friday, Premier Wen Jiabao said in a speech to the NPC that the yuan will be kept "basically stable" at an "appropriate and balanced" level this year, a formula of words that left the situation unclear.
Su Ning, vice-governor of the central bank, said"China would properly deal with the demand for yuan appreciation".
In a monetary policy report released in mid-February, the central bank reiterated the country's long-standing policy stance of keeping the renminbi's value basically stable at a reasonable level while reforming the exchange rate regime "in a pro-active, controllable and gradual manner."
China is likely to allow the yuan to appreciate by 2-3% at most, over the next 12 months, foresees Mario Singh, co-founder & CEO of FX1 Academy. He tells CNBC's Anna Edwards & Chloe Cho what needs to happen before it will allow a sharp rise in the value of the yuan:
Speaking at the same news conference as Zhou, Commerce Minister Chen Deming said China's exports may need two or three years to return to the pre-crisis level, and called for the United States to loosen restrictions on high-tech exports to China to bridge the trade gap.
"Although China's exports have regained momentum since the beginning of this year, it would take two or three years for exports to return to the level of 2008, as global recovery is still haunted by uncertainties," Chen said.
When asked for comments about some US officials labeling China as a 'currency manipulator,' Chen said he had not got official information on the issue, but he noted exchange rates did have relations with trade, unless the bilateral trade was completely "open".
However, that was not the case between China and the United States considering the US restrictions on high-tech exports to China, Chen said.
"What is the point of talking about surplus and deficit if bilateral trade is not on the basis of openness and equality?"he asked.
"As a matter of fact, many Chinese importers told me they wanted to buy from America, but were baffled by the US export restrictions," he said.
US exports to China ranges from jumbo jets to farm produce. However, high-tech exports are banned. The US government intensified restrictive measures in 2007, according to Chen.
Chen said the US restrictive measures were not fair for the US exporters, producers and consumers, notably against the background that President Obama pledged to double US exports in five years to ease unemployment.
The US restricts high-tech exports as it fears the technology would be hijacked for military purposes.
It acknowledges various metrics which show it as an economic powerhouse.
The commentary says that while China's 33.5-trillion-yuan GDP is the world's third highest, its per capita GDP is far lower, at above $3,000. It cites Foreign Minister Yang Jiechi who said in early February during a trip to Munich, Germany, that this per capita level ranked 104th in the world.
On issues such as climate change and currencies, being a developing country is a more comfortable place to be.
There are three things China needs to do to drive domestic consumption, says Stephen Roach, Asia chairman at Morgan Stanley. He outlines what Beijing needs to do, with CNBC's Karen Tso & Martin Soong:
