China, US currency battle underscores global concerns

BY PUSHING China hard to revalue its currency, the United States may also be doing a favour for export-driven Asian and European nations reeling from Beijing's exchange-rate policy.

Many of these economies, like the US, have long complained that a weak yuan has been giving China an unfair trade advantage at their expense. But unlike the US, they have been less aggressive in championing their cause.

The Asian nations are reluctant to anger their giant neighbour and growth driver, while the European Union's trade deficit with China is not as alarming as that of the US.

American lawmakers last week introduced legislation to punish China with trade sanctions and demanded US President Barack Obama label the Asian giant a currency manipulator, a move that could trigger tougher action on Beijing.

Treasury Secretary Timothy Giethner, who has to decide on the issue next month, said the yuan issue was a global problem and not confined to the US alone.

"It is a very important issue it is important for China, for all China's trading parners, it is very important for the United States," he told the Fox broadcasting network when asked about the currency legislation in Congress.

"It is not just an issue between China and the US but for the world economy as a whole."

The US trade deficit with China soared to nearly US$227 billion in 2009 much larger than the total deficit suffered by all China's major trading partners of US$196.1 billion in 2009.

China made its currency a little flexible in 2005 following US pressure but when the global financial crisis erupted in 2008, it repegged the yuan to the US dollar to prop up Chinese exports and revive the economy.

Between 2005 and 2008, China allowed the yuan to appreciate by about 20 per cent against the dollar but experts say the Chinese currency is undervalued by up to 40 per cent.

"China's policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done," said Nobel Prize-winning US economist Paul Krugman. Global economic growth would be about 1.5 percentage points higher if China stopped restraining the value of its currency and running trade surpluses that are adding to its US$2.4 trillion hoard of reserves, he said. "This is the most distortionary exchange-rate policy any major nation has ever followed. And it's a policy that seriously damages the rest of the world," Krugman added.

The World Bank and the International Monetary Fund also think the yuan needs to be stronger.

"The renminbi (yuan) is very much undervalued" and it is logical that with the world economy regaining its balance "the renminbi will appreciate", IMF Managing Director Dominique Strauss-Kahn said last week.

Chinese Premier Wen Jiabao has vowed to resist any foreign pressure for a stronger yuan, saying Beijing made "strong efforts" since the outbreak of the financial crisis to keep the yuan at a "stable level".

Beijing's rigid exchange-rate policy is also preventing other Asian export-driven nations from allowing their currencies to appreciate for fear of losing their export competitiveness to Chinese firms benefiting from the yuan's government-enforced stability.

"In the short run, with capital pouring into emerging market countries, their ability to respond to the threat of asset bubbles and overheating is undermined," said Arvind Subramaniam, an expert at the Washington-based Peterson Institute for International Economics.

Emerging-market countries such as Brazil, India and South Korea "are loath to allow their currencies to appreciate to dampen overheating when that of a major trade rival is pegged to the dollar," he said.

The EU trade commissioner, Karel De Gucht, has also lashed out at what he said was a "deliberate" policy by China of keeping its currency undervalued.

He warned in January when he took up the post that China's foreign-exchange stance posed a "major problem" for global economic recovery and undercut European exporters.

China has overtaken Germany as the world's biggest exporter.

The "real victims" of China's policy were other emerging-market and developing countries "because they compete more closely with China than the US and Europe, whose source of comparative advantage is very different from China's," said Subramaniam.

AFP