06.20.10

China's Currency Ploy

Despite the signals coming from Beijing, don’t expect the yuan’s value to change much, says Gordon G. Chang. The Chinese are just hoping to deflect international pressure ahead of the G-20 and buy time for their exporters.

Today, equity markets in Asia opened higher, buoyed by Beijing’s surprise weekend announcements promising a flexible currency policy.

Since July 2008 the Chinese currency has “traded”—if we can use that term—within an eyelash of the reference rate of CNY6.83=US$1. That’s because the People’s Bank of China, the country’s central bank, buys and sells currency to make sure the renminbi hits that target virtually every business day.

China’s excessively selfish currency policy does not sit well with other nations.

Most analysts think the renminbi is undervalued, perhaps by 25 percent to 40 percent against the dollar. No one, however, really knows its true value because Beijing is determined to intervene in its currency markets. By keeping the renminbi artificially low, the central government makes Chinese exports cheap in foreign countries.

On Saturday, the central bank signaled a move toward a floating yuan, as the renminbi is informally known. On Sunday, however, the bank backtracked, saying any adjustment in the currency’s value would be small.

The bank meant what it said on Sunday. Today, the first trading day after the PBOC announcements, the renminbi’s reference rate was kept unchanged.

What’s going on in the Chinese capital? First, bureaucracies in Beijing cannot agree on currency policy. The central bank wants a floating yuan. The Ministry of Commerce, however, is determined to help the country’s exporters by keeping the currency cheap.

China’s excessively selfish currency policy does not sit well with other nations. On Friday, for instance, the White House released a letter from President Obama seeking cooperation at the upcoming meeting of the G-20, which convenes in Toronto on Saturday. The most important point in his message related to the yuan. “I also want to underscore that market-determined exchange rates are essential to global economic vitality,” Obama wrote in the letter to his “G-20 colleagues.” “The signals that flexible exchange rates send are necessary to support a strong and balanced global economy.”

The president is right. By far, the most important topic on the G-20 agenda will be creating “a more balanced pattern of global growth,” as he put it. The most important imbalance at this moment is the Chinese current account surplus, which totaled $297.1 billion last year. The most important reason for that outsize surplus is Beijing’s extraordinarily successful—and predatory—export-promotion policies.

And the most important of these policies is the fixing of the renminbi to the dollar.

To head off pressure, the PBOC released its Saturday announcement.

Despite the signals from the Chinese capital, don’t expect the yuan’s value to change much in coming months. This Thursday, People’s Daily, the Communist Party’s flagship publication, said the renminbi could be overvalued. That statement, simply put, means Beijing might actually try to depreciate its currency.

Moreover, last week Beijing announced that its currency is off the table in Toronto. “We don’t think it is appropriate to discuss the renminbi exchange rate issue at the G-20 summit,” Foreign Ministry spokesman Qin Gang said on Thursday. The Chinese currency, he noted, is “not the cause for the international financial crisis, nor is it a barrier for world economic recovery.”

Those comments capped days of threats issued from Beijing. “If we allow the G-20 to turn into a process of finger-pointing, then it will certainly send out a very confusing and misleading signal to the markets and to the general public,” said a senior Chinese official, speaking anonymously. “This will certainly lead to very serious consequences in the global economy.”

Beijing has staked out a position, and it will be difficult to retreat from it. A quick appreciation of the renminbi is unlikely because the Politburo Standing Committee, China’s ruling body, is sending its most anti-Western member, General Secretary Hu Jintao, to Canada this week.

There he will face a united front. The Obama administration, which hopes America can export more to China, obviously wants Mr. Hu to relent. At the U.S.-China Strategic and Economic Dialogue in Beijing at the end of last month—essentially this year’s “G-2” meeting—Treasury Secretary Timothy Geithner made currency the centerpiece of his efforts, but the Chinese stiffed him, both in private and public. Japan’s new finance minister on Friday added his voice to the chorus. Europe, even though it has been benefiting from a falling currency recently, still wants the Chinese to do something about the yuan.

Yet it is not only the so-called rich nations that are concerned. Brazil and India, beginning in April, publicly backed calls for Beijing to let the renminbi trade freely. These days, however, the Chinese do not want to listen to any nation, rich or poor. They equate words of advice about the renminbi to violations of their nation’s sovereignty, making compromise hard to achieve.

There is, in short, a standoff. As IMF chief Dominique Strauss-Kahn said on June 5 about China, “something obviously has to be done.” And something will be. A series of Treasury secretaries, especially the current one, has been “slow-danced by the Chinese,” to use the memorable phrase of Senator Ron Wyden, the Oregon Democrat. Two of Wyden’s colleagues, Charles Schumer and Lindsey Graham, probably have the votes to pass their long-deferred China currency bill, which will punish Chinese products.

In the meantime, the Chinese hope the PBOC announcement will deflect international pressure and buy some more time for China’s exporters. This is an obvious ploy. Beijing is waiting to see if it will work.

Gordon G. Chang is a Forbes.com columnist and the author of The Coming Collapse of China.