Thursday, May 20, 2010

China Officials Say Won’t Yield to Yuan Pressure at U.S. Talks

May 20 (Bloomberg) -- Chinese officials said the nation won’t yield to global calls to end the yuan’s 22-month peg, damping speculation next week’s U.S.-China trade talks would trigger appreciation.

China won’t succumb to external pressure and will modify the currency based on the economic situation, Assistant Finance Minister Zhu Guangyao said in Beijing today. Stability between the world’s major reserve currencies will aid the global economic recovery, he said at a briefing to discuss the May 24- 25 Strategic & Economic Dialogue in Beijing.

“Only the authorities of a sovereign country have the right to decide how to form the exchange rate,” Zhu said. Countries should “work to maintain the stability of exchange rates between currencies so as to create a favorable environment for the global economic recovery,” he said.

China has held the yuan at about 6.83 per dollar since July 2008, after allowing it to appreciate by 21 percent over three years. Treasury Secretary Timothy Geithner, among officials participating in the talks, this week called for China to ensure a “level playing field” for U.S. companies.

The yuan’s 12-month non-deliverable forward contracts fell as much as 0.3 percent to 6.7358 per dollar in Hong Kong, 1.4 percent stronger than the spot rate of about 6.83, before trading at 6.7090 as of 12:23 p.m. in Hong Kong. The projected gain of 1.4 percent was the least appreciation indicated by the contracts since September. Against the euro, China’s currency has strengthened 17 percent this year.

‘Mixed Messages’

China’s commerce minister, Chen Deming, told reporters in Austria yesterday his country would maintain the stability of its currency to foster economic growth, Xinhua News Agency reported today. The yuan’s peg to the dollar is unlikely to be a “major issue” at next week’s discussions in Beijing, the China Daily reported, citing central bank adviser Li Daokui.

Li said the SED is expected to “play down” the currency issue, giving China “leeway” to make its own decision, according to the Beijing-based English-language newspaper. Pressure for appreciation may decline as the nation’s trade surplus shrinks, the China Securities Journal said today in an editorial.

“There are a lot of mixed messages coming out before the SED talks and the G-20 meetings causing speculation for a move, but I still don’t think it’s imminent,” said Mitul Kotecha, head of global currency strategy at Credit Agricole CIB in Hong Kong. “Appreciation in two to three months is on track, but the euro’s decline and the European debt crisis have delayed it.”

G-20 Meeting

Finance ministers from the Group of 20 nations will meet June 4-5 in Busan, South Korea. The central bank governors of Brazil and India last month joined the U.S. in calling for China to allow the yuan to appreciate.

China is the largest foreign investor in U.S. Treasuries and also the country’s second-largest trading partner. Total U.S.-China trade in goods was $94 billion for the first three months of 2010, up 19 percent from the same period in 2009. The U.S. trade deficit with China was $52 billion in the first three months of the year, up 3 percent from the first quarter of 2009.

The Chinese government may change the yuan exchange rate within two to three months, the National Business Daily reported today, citing Wu Qing at the State Council’s Development Research Center. Adjusting the currency’s exchange rate is preferable to raising interest rates, Wu told the newspaper.

China will likely appreciate the yuan soon, Liu Yuhui, an economist at the Chinese Academy of Social Sciences, wrote in an editorial in Caijing magazine today. Today’s initial decline in the yuan’s one-year forwards presented a good buying opportunity, according to Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong.

‘On Track’

“Li Daokui’s comments yesterday suggest that plans to let the yuan gain are on track,” Kowalczyk said.

Europe’s debt crisis and a higher U.S. savings rate should help motivate China to let its currency appreciate and broaden policies aimed at boosting domestic consumption, David Loevinger, the Treasury’s senior coordinator for China affairs, said at a briefing in Washington yesterday.

“While we don’t know when China is going to move, we remain confident that they’re going to determine that it’s in their interest to move to a more market-determined exchange rate,” he said.

--Bob Chen in Hong Kong, Michael Forsythe in Beijing. Editors: James Regan, Sandy Hendry