Tags: Pressure | China | Yuan | High

Pressure Mounts on China as Yuan Hits New High

Tuesday, 14 Sep 2010 06:23 AM

 

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China's currency advanced to a fresh high against the U.S. dollar for the third straight trading day Tuesday, as U.S. lawmakers prepared for hearings on Beijing's foreign exchange policies.

China's central bank set the yuan-dollar parity rate at 6.7378 on Tuesday, after putting it at 6.7509 on Monday and 6.7625 on Friday. The yuan closed at 6.7618 on Monday.

China's leaders routinely shrug off complaints that the tightly regulated yuan is undervalued, giving the country's exporters an artificial advantage over U.S. manufacturers. But the crescendo of criticism over the issue in Washington as November elections approach appears to be encouraging Beijing to move a bit faster on allowing the yuan to gain in value.

"They seem to be throwing them a bone, but it remains to be seen how much good it will do," said David Cohen, regional economist for Action Economics in Singapore.

China's parity rates for foreign exchange are weighted averages of prices — given by banks known as market makers because of their ability to quote both buy and sell rates — excluding highest and lowest offers.

By late Tuesday, the yuan was trading at 6.7455 to the dollar, after hitting a low of 6.7446.

Beijing limits the yuan's daily fluctuations to 0.5 percent, preventing any wider swings, and enforces tight limits on foreign exchange dealings, allowing them mainly for trade purposes. The yuan has gained about 1.3 percent in value against the dollar since June, when Beijing severed an 18-month link, saying it would allow a more flexible exchange rate.

The yuan actually weakened against the dollar in August, prompting some economists to scale back forecasts for gains in its value. Most expect a maximum 5 percent annual rate of increase.

China reported relatively strong trade, retail sales and other economic data for August, relieving worries that the economy may be headed for a "double-dip" slowdown that would discourage further gains in the yuan that might hurt the country's exporters.

"They do seem to be managing a soft landing that would allow them to tolerate appreciation," Cohen said.

The dollar's recent weakness may also be adding to upward pressures on the yuan: The dollar has recently traded near a 15-year low against the Japanese yen as investors continue to see the Japanese currency as a safe haven for their money amid worries about the U.S. economy.

China has followed a policy of letting the yuan rise when the dollar falls, and letting it weaken when the dollar gains, in effect neutralizing the impact of any changes on its exporters, says Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates.

"I don't think we're looking at rapid progress," Orlik said, noting worries that the economy will still slow further. "I think we'll just see the yuan creeping up a little bit."

Premier Wen Jiabao, speaking to a business conference Monday, defended China's huge trade surplus, saying it was not intentional. But he offered no new measures to ease tension with Washington over the trade surplus, and did not mention Beijing's currency controls.

"We do not pursue surpluses in trade," Wen told about 1,500 business leaders attending a meeting of the Geneva-based World Economic Forum.

"China's economic growth has created major opportunities for multinational companies," he said. "It has become an important engine for the world economic recovery."

Tension has risen as U.S. lawmakers face pressure to create jobs ahead of November elections, with some pushing for a bill that would impose sanctions on China if it does not do more to let the yuan rise.

The House Ways and Means Committee is due to meet Wednesday to discuss the issue, after China reported its second-biggest trade surplus this year in August, at $20 billion.

On Monday, U.S. Treasury Secretary Timothy Geithner was quoted by The Wall Street Journal as saying Beijing had done "very, very little" to allow the yuan to rise since promising a more flexible exchange rate in June.

"It's very important to us, and I think it's important to China, I think they recognize this, that you need to let it move up over a sustained period of time," Geithner was quoted as saying.

The yuan's modest advance may lend Geitner and others symbolic support as they fend off calls for harsher measures, said Orlik.

"It gives the administration a fig leaf, if you like, to say, 'Look it's not as fast as you'd like or as fast as we'd like either, but there has been some progress,'" he said.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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