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ECONOMY-CHINA: Yuan’s Slide No Power Game

Analysis by Antoaneta Bezlova

BEIJING, Dec 9 2008 (IPS) - Recent downward movements of the Chinese yuan have been interpreted here as political statements aimed at the incoming administration of United States president-elect Barack Obama to respect China’s sovereignty rights on the currency issue.

But there are signs that the yuan’s sharp fall, last week, is more than just a salvo in a tense diplomatic exchange.

Speculations have risen that, not unlike the U.S. during the Great Depression, China is trying to export its way out of the economic crisis.

“China can go through its own version of the 1930s Great Depression,” argues Michael Pettis, professor of finance at Guanghua School of Management at Beijing University.

According to Pettis, Beijing’s recent moves – increase in subsidies to exporters and the halt of the appreciation process of the renminbi – all bear similarities to the ways the U.S. sought to export its problem of overcapacity in the 1930s.

The sudden drop of the yuan came as a surprise because Beijing exercises heavy control over the currency’s value. While most Asian currencies (except the Japanese yen) have fallen against the US dollar in recent months, the renminbi has remained stable.

China has also gained miles of political credit from its decision to keep its currency stable during the 1997 Asian financial crisis and often reminds its neighbours of that effort. Chinese officials have not discouraged expectations either that they would repeat this feat during the current economic crisis.

But then the Chinese yuan fell by its maximum daily trading limit of 0.5 percent against the dollar for two consecutive days last week – the largest such change since China ended its effective peg to the US currency in 2005.

The sudden and steep fall of the yuan on Dec.1 came ahead of the latest round of biannual US-China strategic economic dialogue held in Beijing where US treasury secretary Henry Paulson was expected to raise the heat on his hosts to speed up the appreciation of the Chinese currency.

“Little concrete results can be expected to be achieved with a lame duck administration,” said independent economist Xie Guozhong. “That is why Beijing chose this time to send a strong signal to the incoming US administration that they need to be more considerate about China’s needs to maintain its currency stable.”

As a candidate for the U.S. presidency, Obama had accused China of keeping the value of its currency artificially low to protect the competitiveness of its export prices.

An editorial in the China Times newspaper was even more emphatic: “The currency move is a political signal aimed at the Obama administration not to exercise more pressure on China to revalue its currency.”

China has been under immense pressure from its trade partners in the west to allow the yuan to appreciate and thus reduce its huge trade surplus. Over the last two years China did allow the yuan to gain value relative to the dollar. But the process has come at a high price – hitting Chinese exporters, already struggling with rising costs and slumping global demand.

In mid-November already, Zhou Xiaochuan, governor of the People’s Bank of China, said that he could not rule out a depreciation of the renminbi if the external environment remained tough for Chinese exporters.

His statement was followed by comments by President Hu Jintao that China was in danger of losing its completive edge in trade. Speaking to a regular study session of top Communist party officials, Hu warned that the economic crisis was testing the government’s ability to steer the country through simultaneous global recession.

Several weeks ago Beijing announced a stimulus package of 4 trillion yuan (586 billion dollars) in government and private-sector spending on public works and social programmes but little of that package is aimed at helping the collapsing exporters.

The yuan’s drop came amid signs that the economic slowdown was hurting the country’s exports more than what had been previously envisaged. In southern China where the main manufacturing hubs are based, hundreds of factories have gone bust, throwing thousands of workers on the streets.

November trade figures are expected to be released Wednesday and experts anticipate the export growth will be negative.

The Ministry of Commerce’s latest trade outlook report warns of more closures amid plunging global growth rates. “The situation will get even more complicated, and there will be more uncertainties in 2009,’’ the report said.

In recent years exports have accounted for about one-third of the country’s GDP growth. Beijing has been trying to shift gears and boost domestic consumption as the new driving force for growth but change has been slow.

In the days after the currency drop speculations grew that Beijing was going to adopt a long-term weaker yuan policy to try and bail out its struggling exporters.

“There are still several leverages that the government could use to increase exports including the exchange rate,” said Pei Changhong, a trade expert, in the ‘Blue Book of China’s Economy’, released by the China Academy of Social Sciences.

China’s commerce minister Chen Deming has rejected suggestions that the drop in the yuan was a deliberate government move to stabilise exports, saying it was due to “purely market forces”.

The yuan’s value has been a perennial bone of contention between China and its trade partners in the West, particularly the U.S. which says the low value of Chinese currency has allowed Beijing to grow its economy at the expense of competing countries’ manufacturers.

China generates a huge trade surplus of goods and services, which last year accounted for nine percent of its GDP. As more and more economies enter recession, Beijing’s moves to use currency regime to ward off economic troubles are likely to raise protectionist hackles in more than one country.

“They (the Chinese) can’t get away with increasing their trade surplus and exporting their over-capacity,” says Michael Pettis. “There would be a wave of anti-China sentiment around the world”.