Politics muddle yuan debate
- Boo Chanco () - April 9, 2010 - 12:00am

You can expect politicians anywhere, out to win points with their voters, to muddle any discussion of vital issues. This is part of the democratic process. The problem arises when they not only misrepresent the issue but threaten an outcome opposite what the same politicians want to happen.

The yuan debate is a good example. The Chinese government has been under heavy pressure from the United States to revalue their currency, the yuan, for some time now. The Americans accuse the Chinese of unfair trade practice by keeping the yuan’s value pegged to the dollar. Now some key members of Congress want the Treasury Department to declare China a currency manipulator so that trade sanctions can be imposed.

The last thing the world needs is an escalation of the war of words between the two superpowers that could lead to a trade war at a time when the world economy is barely recovering. The leaders of both countries know that and they also know that their economies are sufficiently tied to each other so that neither can afford sanctions against each other.

Given the tough US economy and the bad unemployment situation there, cheap Chinese imports have been easy targets to blame for America’s woes. Politicians love to point to cheap Chinese imports to explain why there are so many jobless Americans.

It is, of course, not as simple as that. But angry Americans can take quick solace in blaming a country across the ocean for their current miseries. They don’t realize that imposing trade sanctions on China will hurt companies like Walmart, probably one of China’s largest exporters to America. More expensive imports may also keep consumers in general from getting their stride and thus keep a full recovery of the American economy elusive.

From the Chinese perspective, Beijing has kept the yuan pinned in a tight range near 6.83 per dollar since mid-2008 because they are deathly scared of what any movement may do to their domestic economy. There are enough Chinese economists and policy makers who realize they have to move on the yuan to address rising inflation and threatened bubbles in their domestic economy. But the decision to move will be made by political leaders.

Key members of the Chinese political leadership are afraid that if they move too quickly, there may be serious implications to among other things, jobs availability in China. I understand they are now doing some simulations so that there won’t be any big surprises. The Financial Times reports that a Chinese foreign ministry official made it clear China will adhere to three principles vis-à-vis the yuan: any change must be controlled; it must be Beijing’s own initiative and any shift must be gradual.

A decision by President Hu Jintao to visit Washington early next week for nuclear talks is a good reason to move back the deadline for a Treasury department declaration that could include China in a list of countries considered currency manipulators. One-on-one talks between Hu and Obama can yield better results without a threat of such a declaration hanging over China.

The Obama administration has realized the changing mood in China and is therefore eager to resort to diplomatic options at this time. The Treasury Secretary prefers to be patient a little longer. This is why the Treasury Secretary made a surprise side trip to China at the end of his visit to India this week.

That visit to India is another dimension to the Treasury Secretary’s diplomatic approach. He has likely urged the Indians to join the US in an international clamor urging China to do something about the yuan sooner rather than later.

Indeed, India and China’s other trading partners in Asia, including us, have been quietly complaining too about the negative impact of the yuan’s peg on exports. With the free trade agreement between China and Asean already in effect, Asean members whose currencies are market determined are at a big disadvantage to China’s dollar-pegged yuan. 

Curiously, China has allowed a more vigorous internal discussion of its yuan policy. According to Reuters, outside of economists and government policy makers, private sector business personalities have weighed in on the issue. Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd., said a stronger yuan would boost consumers’ purchasing power. Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group Co., said a stronger currency would cut import costs.

“The latest development should make it more likely for Beijing to start moving away from the renminbi’s current de facto peg within the next few months, if not weeks,” Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, wrote in a report. “Since China is growing much faster than most of its trading partners, keeping the de facto peg for too long will only invite more protectionism.”

Beijing allowed the yuan to rise 21 percent against the dollar between July 2005 and July 2008 before effectively repegging the currency, also known as the renminbi, near 6.83 to the dollar to help exporters ride out the credit crunch. And the yuan is expected to move once China’s political leaders see that there is more upside to its domestic economy than downside in a shift in policy.

The central bank of China for one, would benefit from having an extra tool in its policy kit if the exchange rate were able to rise and fall to help absorb economic shocks. Even as Chinese Premier Wen Jiabao rebutted arguments that the yuan is undervalued, it seems the top political leaders are keeping an open mind on the issue.

They surprisingly allowed Xia Bin, who was picked to join the People’s Bank of China’s monetary policy committee to say the yuan should be allowed to appreciate immediately. China “should resume the pre-crisis managed floating exchange rate as quickly as possible,’’ Xia was quoted as saying.

Li Daokui, another new member of the advisory body, said China should scrap its peg to the dollar before September. “One way of relieving pressures on the renminbi exchange rate is to make an adjustment on China’s own initiative,” Li, an economist at Tsinghua University, was quoted as saying.

So it may be a matter of time before China moves on the yuan. According to the Financial Times, Beijing is now preparing a shift in policy by expanding the currency trading band. “Some grand bargain between the US and Beijing appears to be in the works if it hasn’t already been struck,” FT quotes an economist at the Standard Chartered Bank in Shanghai.

Gross international reserves

The Bangko Sentral reports that end-March 2010 GIR hits $46 billion mark. I imagine that most of that money is invested in US Treasuries.

Isn’t it ironic that this debt-ridden third world country with a rising hunger and poverty rate is actually financing America’s profligate fiscal policy?

Of course we don’t have much of a choice.

Manual count

The Comelec must have an open mind on suggestions from concerned citizens regarding the first computerized election. Comelec must seek to reassure many of us who are worried about those machines failing to deliver a credible election. Here is one unsolicited advise which I hope the Comelec will consider.

Let us have a 100-percent manual count side by side with the computer count for the President, Vice President and the Governor and/or the Mayor. That should not take too much time and it will reinforce the credibility of the election results.

But if plans are already in place to cheat through those computers, of course such a manual count for just three or four positions will have to be rejected. A reported Comelec ruling about to be announced against the Liberal Party, the real opposition in this contest, makes sense in the context of planned cheating.

Political films?

Mark Madrona posted this on Facebook.

The eight must-see films of 2010, starring Filipino politicians!!!

1.“Kung Ako Na Lang Sana” – starring Korina, Noynoy, Mar and Shalani

2.“The Unfaithful” – with Gloria Arroyo, Gibo Teodoro and Manny Villar

3.“Pera sa Kalsada” – Manny and Cynthia Villar

4.“One More Chance” – featuring Joseph Estrada

5.“Ang Pamana” (The Inheritance) – with Jejomar Binay, Junjun, Abigail and Elenita

6.“Meet my Parents” – Noynoy Aquino (special participation of Ninoy and Cory)

7.“The Three Stooges” – Lito Lapid, Bong Revilla, Tito Sotto

8.“Kung Malaya Lang Ako” – Ariel Querubin, Danilo Lim

His slogan? Mama at Papa...

Boo Chanco’s e-mail address is bchanco@gmail.com. This and some past columns can also be viewed at www.boochanco.com <http://www.boochanco.com>

BEIJING CHINA CHINESE COMELEC FINANCIAL TIMES TREASURY SECRETARY YUAN
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