The U.S. Treasury Department's decision not to label China a currency
manipulator makes it more likely that Washington will get what it wants: a
stronger yuan.
Beijing is likely to respond by allowing the yuan to resume its steady climb
against the dollar that stalled last month, according to many economists and
analysts who follow China.
That might not have been politically possible had Wednesday's decision gone
the other way, even though a stronger currency might be in China's own best
interests because of concerns that its economy is overheating. Chinese
leaders are still constrained by public sensitivity to perceived U.S.
bullying, and don't want to be seen as caving in to U.S. pressure.
China's central bank on Thursday declined to comment on the U.S. move. But
its actions in the foreign-exchange market during the past several weeks
indicate that Beijing had put its currency policy on hold while it waited for
the U.S. Treasury decision.
China's Ministry of Foreign Affairs responded to the Treasury report by
defending its currency policy as "highly responsible" and suitable to both its
own economic needs and the interests of regional financial stability. Ministry
spokesman Liu Jianchao also reiterated China's pledge to "unswervingly" continue
to "perfect" its foreign-exchange mechanism and increase the yuan's flexibility,
while maintaining "basic stability" in the currency's exchange rate.
Branding China a manipulator would simply have required the U.S. government
to open formal talks with Beijing. However, it might have also triggered
retaliatory legislation in the U.S. Congress, where politicians accuse China of
unfairly keeping the yuan's value low to make Chinese exports cheaper in dollar
terms. Last year, the U.S. bought $202 billion more in goods from China than it
sold to that nation, leading to a record trade deficit that has fueled tensions
between the nations.
While declining to brand China a manipulator, the U.S. Treasury nevertheless
hardened the rhetoric against Beijing. On Thursday, a senior Treasury official
in Beijing kept up the pressure, saying that "we don't see any technical reason
why China could not move today toward a more flexible exchange-rate regime."
The U.S. official pointed to "a lot of work" China has done during the past
several years to build the infrastructure needed to create a functioning
currency market. Companies can now hedge their currency risks, he said, and the
introduction of interbank foreign-exchange trading has made the market more
liquid.
But uncertainties surrounding the Treasury decision have frozen the market
during recent weeks. The yuan was on track to appreciate 3% to 4% this year.
That momentum died in April, and the yuan has since hovered fractionally below
the psychologically important level of 8 to the dollar. On Thursday, the yuan
remained becalmed at 8.0042.
Trading might become more volatile. Qu Hongbin, chief China economist at
HSBC, said he "won't be surprised" if the yuan strengthens beyond 8 to the
dollar in the next few days and resumes its upward trajectory.
But economists say the yuan's climb will likely be dictated by domestic
considerations, not from a desire to satisfy Washington. "Basically, China will
move at its own pace on yuan appreciation," said Yi Xianrong, a researcher with
the Chinese Academy of Social Sciences, a think tank.
Hong Liang, the China economist at Goldman Sachs, said that while the
Treasury decision "has given China a little bit more breathing room," China
urgently needs a stronger yuan to help cool signs of economic overheating. An
undervalued currency stimulates the economy by encouraging exports and sucking
in investment and speculative money betting on an eventual appreciation.
Since April, Ms. Liang said, the yuan has depreciated by some 3% against a
basket of currencies that includes those of China's major trading partners,
adding froth to the economy. For that reason, some economists expect Beijing to
pick up the pace of appreciation from earlier this year.
Jonathan Anderson, chief Asia economist at UBS, said a one-time appreciation
the yuan of as much as 5% is conceivable, followed by further steady
strengthening.
Adding to signs that cash flooding into China is causing problems, Beijing's
National Bureau of Statistics announced Thursday that producer prices rose by
just 1.9% in April from a year earlier. That was down from annualized growth of
2.5% in March. Factories are finding it difficult to raise prices amid a glut of
capacity, as runaway bank lending has fueled investment in manufacturing.
The U.S. Treasury official made clear that Washington wasn't pushing for
dramatic currency change overnight. Washington has "realistic" expectations, he
said. "We're being practical. We don't expect that China will become Australia
or New Zealand in the short or probably even medium term," he said, referring to
two countries with free currency markets.
He said the U.S. Treasury's objective is a more flexible currency regime in
China, and said the U.S. isn't specifically arguing that the yuan is
undervalued. He also said the Treasury Department rejects the arguments of
critics who "have focused on China's exchange rate as the sole or maybe primary
factor for the large global imbalances."
Indeed, economists who predict China will allow faster appreciation generally
believe the increase will be gradual. There are few expectations that China will
consider the kind of sharp appreciation that some U.S. politicians would like to
see. In fact, economists are divided over whether revaluation in itself would do
much to narrow China's huge bilateral trade surplus with the U.S., although some
say a stronger yuan would trigger wider revaluation around Asia that could make
a dent in the U.S. trade deficit with the region.
