Beijing: China, the second largest foreign holder of US treasuries, said the declining dollar is a bigger concern for the Chinese economy than the yuan’s gains.
“The dollar’s depreciation makes major commodities such as gold and oil more expensive, and reduces the wealth of countries and companies that hold dollar assets,” the acting Chinese commerce minister Chen Deming said on Wednesday at the Strategic Economic Dialogue outside Beijing.
“The yuan’s 6% gain this year against the dollar fits China’s economic needs.”
Chen’s comment underscores the challenge faced by US treasury secretary Henry Paulson in pushing China to let the yuan move more freely and cut the Asian nation’s balance of payments surplus. Faced with little prospect of success, Paulson has focused the twice-yearly dialogue on improving the quality of China’s exports to the US.
“China really hopes the dollar can be solid because it has huge dollars in reserves and because of commodities prices and trade with Europe,” said Mizuho Corporate Bank Ltd’s Tokyo-based strategist Xinyi Lu, who expects the yuan to gain 7% next year.
“When the dollar falls against the euro, the yuan also weakens against the euro, boosting Chinese exports to Europe and drawing more pressure from European officials.”
The yuan rose 0.1% to 7.3714 per dollar as of 3:25pm in Shanghai, the highest since the People’s Bank of China ended the Chinese currency’s fixed exchange rate to the dollar in 2005. The dollar fell to $1.4708 against the euro, from $1.4655.
“China supports a strong dollar,” said Zhou Xiaochuan, governor of the People’s Bank of China, at a press conference on Wednesday.
The Federal Reserve’s decision to cut the benchmark US interest rate also affects China’s monetary policies, the effects of which must be studied, he said.
“The Fed decision has quite a big impact on China’s rate policy,” Zhou said. “What we’re concerned about is whether the Fed’s looser monetary policy will create new financial liquidity, because China’s liquidity problem is connected with excess cash in the world’s markets.”
China’s one-year deposit rate, raised to 3.87% in September, has been surpassed by a November inflation rate that soared to a 10-year record of 6.9%. Inflation in the 11 months through November accelerated to 4.6%.
China owned $396.7 billion (Rs15.6 trillion) of treasuries as of September, up from $71.4 billion in 2000, according to the treasury department. Only Japan owns more among foreign holders.
China on Tuesday reported the country’s third largest monthly trade surplus, with exports exceeding imports by $26.28 billion, 14.7% more than last year. China’s trade gap with the US was $15.2 billion in November.
That’s prompted a backlash among US lawmakers including presidential candidate former Democratic senator John Edwards, who said China is giving its companies an unfair advantage with subsidies and a weak currency.
China must let the yuan appreciate, given “mounting inflation, growing asset bubbles and possible overheating,” Paulson said on Wednesday. “A more flexible exchange rate policy is especially important to China now, given these risks.”
Chen, who took over this week from Bo Xilai in managing the trade of the world’s fourth largest economy said it’s “irresponsible” to rely on the yuan’s gains as a method for closing the China-US trade gap.
The two countries should instead ensure the stability of their own economies and currencies, Chen said.
Yuan hasn’t helped
“China’s trade surplus with US wasn’t narrowed by the continued appreciation of yuan over the past two years,” he said.
“The yuan’s excessive appreciation would cause repercussions” that would hurt the global economy, he said.
China’s trade surplus has helped increase currency reserves ninefold this decade to $1.46 trillion and fuelled the fastest inflation in almost 11 years. Consumer prices rose 6.9% in November from a year earlier.
“Inflation is still largely a result of food price increases,” Zhou said on Wednesday. “We are studying whether adjustments to the money supply or to the price of currency can effectively curb inflation. There may be debates over this.”
China and US should both take measures to narrow trade gap, such as adjusting domestic savings, Chen said, adding the gap is a result of the “different roles” played by the two economies. Chen’s promotion to commerce minister, announced this week by vice-premier Wu Yi, still has to be ratified by China’s parliament.
Yumi Teso in Singapore and Belinda Cao in Beijing also contributed to this story.