China Seems Set to Loosen Hold on Its Currency
HONG KONG — The Chinese government is preparing to announce in the coming days that it will allow its currency to strengthen slightly and vary more from day to day, people with knowledge of the emerging consensus in Beijing said on Thursday. The move would help ease tension with the Obama administration about the United States’ huge trade deficit with China.
China’s exports have been bolstered by its policy of keeping its currency, known as the renminbi or yuan, pegged at a nearly fixed rate to the dollar. Many members of Congress and economists say that by spending several hundred billion dollars each year to hold down the value of the renminbi, China has made its exports extremely competitive in foreign markets and taken away sales from manufacturers in the United States and other countries.
But if China allows only a small move in the renminbi, the effects on the American trade deficit may also be small. Chinese companies are formidably competitive and, while labor costs are rising in China, transportation and communication costs are plunging because of heavy investment in new expressways and rail lines.
A marginally stronger renminbi would make Chinese goods only marginally more expensive in the United States and make American goods slightly cheaper in China, which is now exporting more than four times as much to the United States as it imports.
The move is being made for domestic policy reasons in China, primarily as an inflation-fighting tool, people with knowledge of the emerging consensus in Beijing said on Thursday. While any announcement could still be delayed, China’s central bank appears to have prevailed with its arguments within the Chinese leadership for a stronger but more flexible currency, these people said.
Insisting on anonymity because of the delicacy of the issue in Beijing, they predicted that China’s policy shift could easily occur before President Hu Jintao arrives in Washington next week for discussions with President Obama and other world leaders on improving nuclear security.
Administration officials, especially Treasury Secretary Timothy F. Geithner, have publicly kept quiet to avoid giving the impression that a currency policy shift by China was a result of American pressure, instead of a decision based on what was best for the Chinese economy. Mr. Geithner maintained that silence on Thursday, holding meetings with senior officials in Hong Kong before flying in midafternoon to Beijing for a brief stopover and a meeting with Vice Premier Wang Qishan.
A terse Treasury statement after the meeting with Mr. Wang noted only that the two men “exchanged views on U.S.-China economic relations, the global economic situation and issues relating to the upcoming economic track dialogue of the second U.S.-China Strategic and Economic Dialogue, to be held in Beijing in late May.”
Chinese officials have been publicly wrangling over what to do about the currency for a month. The central bank favors a prompt move, while the Commerce Ministry, aligned with exporters, has opposed currency appreciation. The Obama administration has stayed scrupulously silent, fearing that public comments could backfire by stirring a nationalist reaction in Beijing against international pressure.
Holding down the value of the renminbi through huge currency market intervention has become an enormous expense for China. The central bank spent 9.2 percent of the country’s economic output last year on the purchase of foreign reserves, mainly Treasuries that are now paying low interest.
A stronger renminbi could prove to be a mixed blessing for the United States. If China cuts back sharply on purchases of Treasuries, then the Obama administration could find it harder to finance American budget deficits.
But with the Chinese economy booming, a small move in the renminbi may still leave the central bank struggling with trade surpluses and a tide of speculative investment into China. That could force it to continue buying Treasuries with the extra dollars.
Allowing wider variation in the currency would also make it easier for China’s central bank to fight inflation, which Wen Jiabao, the premier, identified last month as a top concern for the leadership. Consumer prices were 2.7 percent higher in February than a year earlier, after prices were falling as recently as last October. Inflation is accelerating in China faster than most Western economists expected.
A stronger currency helps hold down prices by making imports cheaper. It also gives China’s central bank more room to raise interest rates and brake economic growth while lessening the risk of drawing more speculative investments into the country.
A slightly stronger renminbi that fluctuates each day against the dollar would mainly hurt low-margin, labor-intensive industries in China like shoes and textiles. Many Beijing officials have been worried about job losses in these industries if the currency appreciates.
Much of this production is already starting to move out of China, notably to Vietnam and Bangladesh, where labor costs have stayed low. And Chinese factories producing these goods have been struggling to find enough workers over the last two months as the economy grew powerfully this winter, stimulated by heavy bank lending, strong demand for workers in the retail sector and rising government spending on high-speed rail lines and other infrastructure investments.
In 2005, China allowed the renminbi to jump 2 percent overnight against the dollar and then trade in a wider daily range, with a trend toward further strengthening against the dollar. For its coming policy shift, China may follow a similar pattern, but officials may emphasize much more in public remarks that the value of the renminbi can fall as well as rise on any given day. That would help discourage a flood of speculative money into China from investors betting on rapid further appreciation in the currency, said people with knowledge of the emerging consensus in Beijing.
Xia Bin, a member of the monetary policy committee of the Chinese central bank, hinted at the new policy for the currency while attending a forum in Shanghai on Thursday.
“Whether to let the yuan slowly appreciate or let it rise to a tolerable range after careful calculation, I think it is better to have that quick, prompt appreciation,” he said, according to news service reports.
Mr. Xia later added that, “At a certain point, when necessary, it is better to have a quick, prompt appreciation in a bid to fend off speculative capital.”
But Mr. Xia, who spoke after others had already described an emerging consensus in Beijing in favor of a small move in the currency, cautioned that no one should expect a “large, one-time” appreciation of the renminbi of the sort that many members of Congress have sought.
The central bank declined to comment on its currency plans.