China will not bow to external pressure to revalue the yuan and liberalize its foreign exchange regime at the expense of the country’s broader economic reform plans, People’s Bank of China (PBoC) deputy governor Wu Xiaoling insisted yesterday. Wu’s tough stand, echoed by other senior Chinese officials in Washington yesterday, came as the G7 finance ministers called for accelerated apprecation of the yuan.
The ministers said in their communique last night: “We welcome China’s decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we stress its need to allow an accelerated appreciation of its effective exchange rate.”
Wu, speaking at a conference on China’s exchange rate policies at the Peterson Institute for International Economics in Washington, rejected charges that China is a currency “manipulator”, and claimed that it is behaving in a globally “responsible” manner in its currency strategy.
China “cannot shape [overall] economic policy to suit foreign exchange rate policy,” declared Fan Gang, a member of the monetary policy council of the PBoC, China’s central bank.
Exchange rate reforms are part of longer term policy reforms in China that could take six to seven years to implement fully, Fan said. Wu, who heads the Chinese delegation to the IMF/World Bank annual meetings, refused to respond to demands to give a “timetable” by which China’s current account surplus will start shrinking. But she and other officials acknowledged the danger that inflexibility over exchange rates could trigger protectionism against China.
Other senior international financiers echoed that fear. “I’m really concerned about increased protectionist sentiment against China – because once you introduce an environment of protectionism, it doesn’t stop where you want it to, and it does it achieve what you want it to,” Jacob Frenkel, vice chairman of AIG, told Emerging Markets.
Chinese policymakers “do take the possibility of protectionism into account,” Fan told Emerging Markets. But “policymakers in other countries should take this into their calculations too,” he said. “Protectionism will not benefit anybody. But I believe that, eventually, everyone will restrain their actions.”
Wu also offered an olive branch to those demanding more speedy and more dramatic action from China over its current account surplus. According to Peterson Institute managing director Fred Bergsten, the surplus is set to reach $430 billion this year, equal to one half of the total US current account deficit.
“We have to restructure the economy in order to reduce the surplus,” said Wu. But she claimed that Chinese policymakers are close to achieving a “consensus” on the need for reform that had been previously lacking.
“There has been a speeding up of restructuring” as a result, Wu claimed. “We will try our best to reduce the surplus in the future.” But she questioned whether changes in China’s exchange rate would serve to reduce the current account surplus. Past experience in Japan and Germany had shown that exchange rate shifts have very little impact on the external balance, she said. Shang-Jin Wei of Columbia University also argued that “there is no solid evidence that exchange rates influence the current account.”
Asked to comment on statements by Wu that the ongoing Communist Party congress in Beijing had reached consensus on the need to accelerate structural reform, US Treasury secretary Henry Paulson said last night: “It surprises me not at all. I always said the Chinese were committed to reform. ... developing capital markets more quickly and with an accelerated rate of currency appreciation.”
Paulson said that the key hold-up in China had been the fear that reform would lead to political instability. But he believed that introducing accelerated reforms would lead to greater stability in Chinese markets.
It is not in China’s interest to run a large current account surplus and to accumulate huge foreign exchange reserves, Wu acknowledged. The returns that Chinese receives on investing its surpluses overseas are well below the returns that can be enjoyed on foreign investments in China, she added.
Fan meanwhile criticized the move by G7 finance ministers to hold an “outreach” dinner with the heads of the half dozen biggest sovereign wealth funds last night .”I’m afraid it will achieve something negative against China,” he told Emerging Markets. “Hopefully the world will recognize that we need a more accommodative system for these funds to operate and to become a positive factor in the global market,” he said.