China’s progress on letting its currency rise, cutting its undervaluation against the dollar, remains “insufficient”, said the US Treasury in its Report to Congress on International Economic and Exchange Rate Policies on Friday. “It is a high priority for [the] Treasury to encourage policies that will produce greater exchange-rate flexibility,” it said, expanding the language of earlier reports.
Explicit in the US position is the view that the yuan’s recent appreciation against the dollar, of “around 9 percent” adjusted for inflation since June 2010, has not been enough. The Treasury said “a more rapid pace of nominal appreciation would enable China to achieve the needed adjustment... while reducing inflationary pressures”.
“The US is playing a game of saying it wants more without specifying what it in fact wants [in terms of pace of appreciation],” said Simon Flint, an analyst with Nomura in Singapore. “The message is that [the US] needs to reduce its deficit as quickly as it possibly can.” At the current rate of appreciation, the yuan will reach fair value against the dollar in three to five years, Flint said.
A relatively new addition to the US argument for yuan strength is the restraining impact that a stronger currency would have on Chinese domestic inflation. However, that argument may not be as strong as some US policy-makers suggest.
“The economics on that point may not be entirely correct,” said Hongbin Qu, chief economist for China and co-head of Asian economic research at HSBC in Hong Kong. “China is the world’s biggest importer of commodities, and a stronger yuan may push up commodity prices, so the impact on inflation would be limited.”
China's consumer price index rose an annualised 5.3 percent in April, slowing from a 32-month high of 5.4 percent in March. Beijing has set an inflation target for 2011 of 4 percent.
Despite the US efforts, China is unlikely to see the need to speed up yuan appreciation, Qu said, particularly as the existing pace was having the desired effect of reducing the country’s current-account surplus, now about 3 percent, down from more than 7 percent three years ago.
The policy of export-led growth, employed throughout Asia, had successfully moved millions of people out of poverty, Nomura’s Flint noted, so it is natural that local governments would be conservative about currency appreciation.
“A stronger currency, if reached too quickly, could lead to factory closures and social upheaval. Average incomes in Asia are still relatively low and politicians do not want to risk sacrificing [their gains] in order to support exporters in wealthier countries,” he said.