surprisingly a good article. So is China buying into the argument that greater appreciation of the Yuan is good for everyone, or is this a hollow show of good face to appease critics? The article is likely correct that the Chinese government will appreciate slowly if they do intend to do that so as to maintain greater control, but the point about speculation is ominous. What is more disturbing to the CCP is the thought of massive unemployment in export related industries leading to even greater social instability, as rural migrants have nowhere to go. They can not go to the city to work and the value of agricultural products at home could fall due to greater foreign competition. Remember that most Chinese still live in rural areas, not large cities.
By Keith Bradsher
Friday, December 28, 2007
The yuan has risen faster against the dollar this week than at any time since the end of the Chinese currency’s peg to the dollar in 2005, feeding speculation that the Chinese government has begun allowing a brisker pace of appreciation.
The currency, also known as the renminbi, rose 0.9 percent this week. That included an increase of 0.18 percent on Friday to close at 7.3041 to the dollar in Shanghai trading.
The increase Friday also followed a jump of 0.37 percent Thursday that was the largest one-day increase since Beijing abandoned the peg on July 21, 2005.
Yao Jingyuan, the chief economist of the National Bureau of Statistics, said government officials were now trying to figure out what to do next with the currency.
“It is certain that the yuan will appreciate – the time frame and magnitude of the adjustment is difficult to confirm at the current time. We are busy studying this issue right now,” he said. “What I can say is that it will be dependent on China’s overall economic environment and outlook.”
Yu Yongding, the director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences and a member of the Chinese central bank’s monetary policy committee until last year, said that rising inflation was making it much easier for the Chinese government to accept a stronger currency.
Until recently, the government worried that allowing the yuan to rise would let in more imports and stifle exports, leading to deflation. But the consumer price index in China was 6.9 percent higher in November than a year earlier, led by a rise of 18.2 percent in food prices.
“Because of inflation, people’s fear has been reduced” of allowing faster yuan appreciation, Yu said.
A sustained appreciation of the yuan could lessen frictions somewhat with the United States, the European Union and Japan, all of which have criticized China this year for not allowing faster appreciation – although greater trade tensions may still be inevitable if economies around the globe slow next year.
The comments by Yao and Yu are the latest in a series of hints from current and former Chinese officials that the country’s leadership is beginning to see some advantages in a stronger currency.
On Thursday, the official China Securities Journal reported that Ba Shusong, a deputy director at the government’s elite State Council Development and Research Center, had called for yuan appreciation to slow the rise of food and fuel prices. And on Monday, a newspaper in Shenzhen reported that officials at the central bank had suggested to the State Council, the Chinese cabinet, a one-time increase in the yuan’s value.
The central bank has long favored a stronger yuan, however, and been blocked by the Commerce Ministry and other interest groups. Like most Western experts, Yu said the government was less likely to opt for a one-time revaluation and more likely to choose a faster pace of daily appreciation in the currency’s value.
The danger of allowing a steady rise in the yuan’s value, instead of a jump, is that it may encourage speculators to pour more money into China. The foreign exchange reserves in the nation are already rising by roughly $1 billion a day, mainly because of a trade surplus that has kept rising despite a 7 percent rise in the yuan on the dollar this year.
Yu said China had become less attractive as a place for speculators to make short-term investments because its stock markets now rank among the costliest in the world in terms of ratios of prices to earnings; because China has put limits on foreign investments in its already high-priced real estate markets; and because China has put many restrictions on foreign money entering domestic money markets.
Hong Liang, an economist with Goldman Sachs in Hong Kong, said she expected faster appreciation next year but not a one-time revaluation. Bloomberg News reported that the median estimate of 28 analysts was for an appreciation to 6.88 yuan to the dollar next year. That would be an increase of 6.2 percent from the close Friday.
Stock markets fell across China, partly in reaction to the drop Thursday on Wall Street but also on the prospect for a stronger Chinese currency that could narrow profit margins for many Chinese exporters. The Shanghai A share index declined 0.89 percent, the Shenzhen A share index fell 0.44 percent and the Hang Seng index in Hong Kong plunged 1.7 percent.
Opposition to faster renminbi appreciation has come from three directions in China, according to Chinese political and currency experts.
The most vocal bloc consists of exporters and their allies at the Commerce Ministry, who worry that an ever more valuable renminbi will result in narrower profit margins. Chinese factories also face higher costs after Jan. 1 as a new labor law takes effect that could make it much harder to dismiss less productive employees – although it is unclear how tightly the law will be enforced.
But after years of having their prices beaten down by Wal-Mart and other big corporate buyers, Chinese factories have discovered this year that they can push through price increases.
The U.S. Bureau of Labor Statistics price index for American imports from China fell steadily from when the American government began calculating the series at the end of 2003 until February this year.
But it has jumped 2.4 percent from February through November as businesses in China have experienced such strong demand that they have been able to raise prices and still keep assembly lines full.
Further opposition to faster appreciation has come from political leaders worried about urban unemployment and the potential for rioting if exporters lose sales and lay off workers – or even if exporters simply hire fewer workers each year at a time when nearly 10 million migrant workers are pouring into Chinese cities each year from rural areas.
But this worry also seems to be abating as exporters have shown their ability to thrive even with currency appreciation.
Until very recently, the third obstacle to a much stronger yuan has been the danger that it would lead to cheap food imports that would drive down the prices received by Chinese farmers. This has been particularly important because many officials, from President Hu Jintao on down, want to narrow the gap between rural and urban incomes.
But steep inflation in food prices has benefited many peasants this year to the extent that it reflects strong demand from consumers in China and around the world. Not all peasants have gained, however, as part of the inflation has occurred because of an epidemic among Chinese pigs as well as drought in large areas of southern China.
Dollar’s popularity falls
The dollar’s share of global foreign-exchange reserves fell to a record low in the third quarter as demand for U.S. assets waned after the subprime-mortgage market collapsed, Bloomberg News reported from Washington.
The dollar accounted for 63.8 percent of reserves at the end of September, down from 65 percent three months earlier, the International Monetary Fund said Friday. The euro’s share rose to 26.4 percent from 25.5 percent. IMF quarterly figures go back to 1999, the year the euro was introduced.
The figures suggest central banks diversified out of the dollar as it fell to the lowest level in a decade. Investors sold a record amount of U.S. securities in August when defaults on subprime mortgages rippled through financial markets and the Federal Reserve signaled it would cut interest rates.
“The dollar seems to be losing, at least to some small extent, its favored status,” said David Powell, a currency strategist at IDEAglobal in New York. “Foreign central banks aren’t necessarily shunning dollar assets, but they were more attracted to other currencies.”