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Monday 15 March 2010

China’s priority is its economy

Currency appreciation won’t make any difference in offsetting trade imbalances, says central bank official

BEIJING: China is bent on sticking to what it thinks is best for its economy despite mounting calls from the international community, especially the United States, for the yuan to appreciate.

People’s Bank of China vice-governor Su Ning said China had analysed the relationship between the trade imbalance and its foreign currency policy in considering whether to appreciate or depreciate the yuan.

What it found was that historically the appreciation of one’s currency would not make any difference in offsetting trade imbalances, Su said.

Su Ning
 
“Yes, we are facing a lot of pressure from the outside and such pressure has always been there before and after our currency exchange reforms in 2005.

“But, I think we should deal with this matter based on the laws of economic development in our country,” he told reporters in Beijing recently.

Washington and many of China’s trading partners claim that the yuan has been kept undervalued, giving Chinese exporters an unfair price advantage.

While addressing US senators at a meeting last month, President Barack Obama said the United States would take a tougher stance and put constant pressure on China and other countries so that American products “are not artificially inflated in price and their counterparts’ goods are artificially deflated in price.”

According to the US Census Bureau, the US trade deficit with China widened to US$226.82bil (RM7.5 trillion) last year from US$83.83bil in 2000.

The US dollar fell to 6.8 against the yuan from 7.8 in 2007, and many claim China has decelerated the yuan’s growth rate since 2008.

Theoretically, Su said the appreciation of a country’s currency could resolve the issue of favourable or unfavourable trade balance but this had not been the case for Japan and China.

“The yen appreciated 25.4% in 1985 from the previous year and followed by 25.3% in 1986. But, its global trade surplus still increased from about seven trillion yen in 1984 to 13.7 trillion yen in 1986.

“From the Japanese experience, the yen’s appreciation didn’t address its problem of favourable balance of trade.

“As for China, our currency appreciated 3.35% in 2006, 6.9% in 2007 and 6.88% in 2008 after the currency exchange reform. Our trade surplus continued to grow from US$162bil in 2004 to US$295bil in 2008,” he said.

Su maintained that the imbalance in trade was not mainly determined by foreign currency exchange but rather by whether the domestic demand and supply was balanced.

“Over the past one year, in the face of the crisis, we have done all we could to spur the country’s economic development via domestic spending,” he noted. “We don’t go after favourable trade balance internationally or an increase in foreign exchange reserves. Our priority is to strike a balance between our people’s economic gain and consumption.”

China registered an 8% economic growth last year despite a 16% fall in its exports and this was attributed to the government’s efforts to boost domestic demand to compensate for the lower external demand.

Su said measures and policies such as upgrading farming facilities and technologies and providing subsidies for agricultural products and electrical appliances in rural areas had contributed positively to the increase in people’s wages, which in turn translated to greater domestic consumption.

“Recently, we have seen some good signs; for example, the migrant workers’ salaries have increased. The hike in payroll will increase companies’ operational costs and may even cause a reduction in exports.

“But, on the other hand, giving workers a pay raise will lead to an increase in domestic demand. In the long run, this is a good thing as more companies will be able to increase their production output to meet the domestic demand,” he said.

Su said generally, companies in China had responded well to the needs of the Chinese labour force for a pay rise as they saw more gains than losses in the long term by doing so.

He noted that in the past the salaries of most of China’s citizens were relatively low, adding that if this could not be reversed it would be hard to achieve a balance between demand and supply.

He stressed that by maintaining a stable and healthy economic development, China was actually contributing to the stability of the world economy.

On another matter, Su revealed that this year China would limit new credit availability to 7.5 trillion yuan (RM3.7 trillion), down from 9.59 trillion yuan last year.

Along with other measures such as slowing the supply of foreign currencies and reducing the size of bank loans would keep consumer prices at reasonable levels, he said.

Su also dispelled rumours that the central bank would introduce new measures to discourage housebuyers from purchasing second homes and control housing prices.

By CHOW HOW BAN hbchow@thestar.com.my


1 comment:

  1. Right, currency value alone cannot resolve trade surplus or deficit problems.

    ReplyDelete