tampabay.com

China maintains tight hold on yuan

By ASSOCIATED PRESS
Published July 18, 2006


BEIJING - Worried that China's sizzling economic growth could ignite a financial crisis, the country's leaders have raised interest rates and imposed regulatory controls. But they have avoided the step that Washington most wants: a sharp rise in the value of China's currency.

A more expensive yuan would make China's exports less competitive, shrink its multibillion-dollar annual trade surplus and rein in economic growth, roaring ahead at a 10 percent-plus annual pace.

A year ago this Friday, Beijing revalued the yuan by 2.1 percent and then loosened its decadelong link to the U.S. dollar. Since then, the yuan has been allowed to rise 1.4 percent against the dollar - less than some currencies move in a day.

And China gives no sign it will let the yuan rise significantly any time soon, despite threats of sanctions from U.S. lawmakers and urgings by its advisers.

"The government is going to use everything but the exchange rate to moderate the imbalances that have shown up in the economy," said Stephen Green, senior economist for Standard Chartered Bank in Shanghai. "The currency is really the last tool in the box."

Though seemingly arcane, the argument among economists takes on importance for millions of ordinary workers around the world at a time when their employers face growing competition from a flood of low-priced Chinese exports.

Some American companies complain that the yuan is undervalued by up to 40 percent, giving China's exporters an unfair price advantage and hurting competitors that want to sell to Chinese customers.

But any Chinese concern about foreign repercussions is secondary to a string of domestic problems: creating new jobs for millions of laid-off workers, rural migrants and new college graduates; restructuring lumbering state industries; cooling a construction boom; and reducing poverty in a country where many millions get by on a few hundred dollars a year.

With exports up and inflation down, Chinese officials are reluctant to embrace big changes.

Chinese leaders say they plan eventually to let the yuan trade freely on world markets. But they say doing so too quickly could throw the economy in turmoil and damage the country's frail banks. They say changes will be dictated not by diplomatic pressure but by China's needs.

One key concern facing authorities is how to restrain the country's construction frenzy. They're worried that a financial crisis could erupt if borrowers fail to repay loans for ill-considered projects. So to curb lending, the central bank raised interest rates in April, ordered banks to tighten scrutiny on new loans and banned a wide range of new projects.

Meanwhile, surging exports are bringing in a flood of money, lifting incomes and fueling robust economic growth.

In this climate, a move by Beijing to allow a big rise in the yuan could potentially inflict widespread pain, especially among the smaller players and poor.

Perhaps one reason authorities haven't taken more drastic measures to cool the economy is that inflation, remarkably, hasn't emerged as a major problem. In May, consumer prices were 1.4 percent higher than a year earlier.

"In any normal economy, you'd already see inflation numbers much higher than the official numbers say it is," said Green of Standard Chartered. "But China is not a normal country."

Inflation remains low because of swift gains in productivity and intense competition among Chinese retailers that is holding down prices of food and other goods, Green said.

After intense pressure to loosen exchange rate controls, authorities last July cut the yuan's direct link to the U.S. dollar and started a more flexible system by which the yuan's value would be determined by a basket of currencies. At that time, the yuan was lifted 2.1 percent to 8.11 to the dollar and allowed to move as much as 0.3 percent a day in either direction. But its daily movements since then have been smaller. On Monday, the yuan closed at 7.9992 to the dollar.