Currency Revaluation to Be Gradual, China Says
By KEITH BRADSHER
NY Times
HONG KONG — The Chinese central bank announced Sunday afternoon that any changes in the value of its currency, the renminbi, would be gradual, in a clear attempt to reassure the Chinese people that a move Saturday evening toward a more flexible currency would not result in a sharp or disruptive change.
The central bank’s statement coincided with signs of a backlash in China, where many view a weak currency and the accompanying strong exports as a sign of national sovereignty. The Chinese decision to tolerate a more flexible currency drew caustic postings on Chinese Internet sites, like one on Sohu.com: “I didn’t imagine I would see the day when China would submit to America and agree to appreciation of the renminbi.”
Postings like this criticizing the government’s announcement seemed to disappear almost as quickly as they appeared, an indication that government censors were active. But China’s determination to limit the rate at which the renminbi rises against other currencies, particularly the dollar, is likely to upset members of the U.S. Congress, who have been pressing for quick changes.
When world leaders gather this weekend in Toronto for meetings, enthusiasm about China’s shift to a more flexible currency may be dampened by Beijing’s public caution that any changes in the value will be slow and modest.
Senator Charles E. Schumer, a Democrat from New York, said Saturday that if China did not take specific steps to push up the renminbi “in the next few days,” he would push forward with legislation that could impose restrictions on Chinese exports.
The central bank, the People’s Bank of China, said Sunday that it was determined to “improve foreign exchange management and keep the renminbi exchange rate at a reasonable and balanced level of basic stability, and safeguard macroeconomic and financial market stability.”
A stronger renminbi would make Chinese goods more expensive in foreign markets, providing relief for U.S., European and Japanese companies and workers who have struggled to compete with low-priced exports from China.
But the Chinese government has long been wary of letting the currency move too quickly, for fear that this would lead to mass layoffs and social instability at export factories in coastal areas.
The U.S. Treasury Department had no direct response to the Chinese statement on Sunday, with a spokeswoman for the agency saying that Treasury Secretary Timothy F. Geithner’s comments on Saturday evening remained the American position. Mr. Geithner had said then that “this is an important step, but the test will be how far and how fast they let the currency appreciate.”
While China still muzzles its press through censorship, public opinion as expressed on the Internet has become an increasingly influential force in China. Some Chinese economists and most Western economists say that a stronger renminbi would help China fight inflation, by making imports cheaper, but many Chinese Internet users see international economic issues mainly in terms of rivalry with the United States.
When President Barack Obama imposed steep tariffs on tire imports from China last September, the Commerce Ministry initially issued a tepid response. But faced with furious criticism on the Internet, the ministry changed its position a day later and announced in an angry statement that it would retaliate by taking steps to restrict U.S. exports of chicken meat and auto parts to China.
The statement Sunday was issued only in Chinese and was clearly intended for domestic consumption. In contrast, on Saturday evening the central bank took the rare step of announcing almost simultaneously in Chinese and English that it was returning to its practice from 2005 to 2008 of setting the value of the renminbi relative to a basket of currencies, and not just linking it to the dollar.
The renminbi rose 21 percent against the dollar during those three years, including a one-time jump of 2 percent when the policy was announced in July 2005. But after that one-time increase, the renminbi barely rose for months.
China informally repegged the renminbi at 6.83 to the dollar in July 2008, as the world economy and financial system began to deteriorate rapidly. The Chinese government has kept the value of the renminbi unchanged against the dollar since then by buying hundreds of billions of dollars and euros each year in currency markets, selling renminbi to do so.
To finance those purchases, the Chinese government has been borrowing the equivalent of nearly one-tenth of the country’s economic output each year. Most of this borrowing has come from China’s state-controlled banking system, one of several reasons that lending to small and midsize businesses in China has been squeezed.
Investment bank economists in Hong Kong predicted over the weekend that China would allow the renminbi to crawl higher against the dollar by no more than 3 percent by year-end. One main reason for such a slow rate of increase is that the renminbi, through its link to the dollar, has already surged 15 percent against the euro in the past two months during the economic difficulties in Europe.
The central bank also said Sunday that it would not let the value of the renminbi “overshoot,” an economic term for a currency’s rising or falling so fast that it passes whatever level might be justified by long-term economic fundamentals. The central bank gave no indication of what it thought a sustainable level would be.
The International Monetary Fund concluded in a comprehensive annual report on China last summer that the renminbi was significantly undervalued, a term that the multilateral agency reserves for currencies that are more than 20 percent below where market forces would normally set them, according to people who have seen the report.
But China’s trade surplus has narrowed in recent months, even turning into a small deficit in March. This has prompted Western economists to suggest that the undervaluation may have narrowed somewhat as demand in China has begun drawing in more imports, particularly commodities from developing countries and luxury goods and factory equipment from Europe.
The Chinese government has used its discretion under I.M.F. rules to block the release of that report because it would provide ammunition for China’s critics, even though Beijing did allow the release of previous annual reports by the I.M.F. that did not include a detailed evaluation of its currency policies. China’s insistence on suppressing the report is the first instance of an I.M.F. member country doing so after having agreed to the release of previous annual reports.
A few countries, like Sudan, however, have never agreed to the release of any of the I.M.F. annual reports on their economic policies.
In contrast with the central bank’s previous switch to a basket of currencies in 2005, the People’s Bank of China had been indicating for weeks this spring that it would break the renminbi’s peg to the dollar.
Zoe Zhang, the sales manager at Dongguan Wellcom Electronics, which makes portable CD players in Dongguan, China, said Sunday that her company was ready for the renminbi to move gradually.
“Last time the government appreciated the renminbi, we were all caught by surprise,” she said. “But this time, we have been expecting the renminbi to appreciate since April.”
The Obama administration has sought to minimize public confrontation with China and could be put in a difficult position if the renminbi barely moves against the dollar, even after China breaks the renminbi’s peg to the dollar.
Mr. Geithner postponed in April the release of a twice-a-year report to Congress on whether China was manipulating the value of its currency.
The Treasury has made no further decision on what to do about that report, a U.S. official said Saturday evening. The official insisted on anonymity because of the sensitivity of currency issues.
The first sign of China’s plans for the renminbi was likely to come about 9 a.m. local time on Monday, which will be 3 a.m. in Paris and 9 p.m. Sunday in New York. That is when the Chinese government was to issue the initial benchmark for renminbi trading Monday in the Shanghai currency market.
The government officially allows the currency to vary by as much as 0.5 percent each day around the initial benchmark, but it has restricted the actual daily variation for the past two years to around 0.01 percent.
Hilda Wang contributed reporting.
Source: NY Times
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