When finance ministers from the G7 rich nations dine in the Florida seaside resort of Boca Raton this week, the spectre at the feast will be China, whose turbo-charged trade and rigidly pegged currency are increasingly a topic of global significance.
Even though the world’s most populous nation has yet to be admitted to the G7, its exchange rate policy is now seen as a crucial element in stabilising the fluctuation in international currency markets.
Although G7 officials have confirmed that the question of China’s currency and trade will be on the agenda, ministers are believed to be too divided to issue a statement at this meeting.
Even so, speculators are betting billions of dollars that China will be unable to resist the growing calls for an appreciation for much longer.
Pressure for a revaluation has risen sharply over the past year, particularly in the United States, where unions blame the cheap renminbi, also known as the yuan, for the loss of millions of jobs. With a presidential election looming, attacks on the cheap renminbi as an unfair trade advantage are expected to increase.
Judged by market values, the rates certainly appear anachronistic. Since the mid-1990s, the Chinese currency has been pegged to a tight band of 8,276 to 8,280 to the dollar, even though growth rates have been vastly different and trade volumes have undergone a dramatic change in the same period. Last year, the renminbi barely budged, even though China’s output sprinted forward at 9,1%, the fastest rate since 1997.
But it is also clearly politics as much as economics driving the calls for change. Europe has suffered the most but complained the least as the renminbi has shadowed the dollar’s downward plunge against the euro.
During visits to Beijing in recent months, European Union ministers have emphasised that they are more concerned about the negative consequences of a possible revaluation on China, which has become an engine for global growth.
Any sudden change in the renminbi, they warn, could threaten China’s perilously shaky banking system and cause enormous unemployment and social unrest.
China may be unable to resist an appreciation of its currency before the US election in November. Expecting the renminbi to rise, investors are believed to have pumped $20-billion to $30-billion into China, pushing up foreign exchange reserves to a record $403,2-billion.
Analysts say the government will probably widen the trading band of the renminbi as a step towards re-pegging it against a basket of currencies.
Whatever the mechanism, once movement begins the only possible direction is upwards. ”I think the renminbi’s value could rise by about 2%to 3%,” said Li Yafen of the Bank of China’s International Finance Institute.
”But it will be controlled. The government maintains a strong hand on the market.” — Â