Yuan’s slide no power game
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 US 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 US sought to export its problem of overcapacity in the 1930s. 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.”
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.
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.
China generates a huge trade surplus of goods and services, which last year accounted for nine per cent 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.” — IPS