China has attempted to head off a looming trade war with the United States by announcing a hat trick of measures designed to slow down the world’s fastest-growing, developing economy.
Last weekend Beijing raised interest rates, tightened controls on credit and widened the band in which the yuan can trade against the dollar in a move carefully designed to coincide with two international gatherings over the coming days.
Analysts said China had acted to defuse tension ahead of last Saturday’s meeting of G8 finance ministers in Potsdam and this week’s Strategic Economic Development talks between US Treasury Secretary Henry Paulson and a Chinese delegation led by Vice Premier Wu Li in Washington.
The US’s burgeoning trade deficit with China has fuelled demands for the Bush administration to sanction import tariffs amid claims that Beijing has deliberately held down the value of the yuan to make life easier for Chinese exporters.
Ashraf Laidi, chief foreign exchange economist with CMC Markets in New York, said the concessions by Beijing were unlikely to be enough. The US has been demanding an appreciation in the value of the yuan, but China’s latest move merely widened the band in which the Chinese currency can fluctuate — up or down — from 0,3% to 0,5%. Beijing admitted that the changes were unlikely to lead to a substantial appreciation of the currency.
”The announcement is unlikely to prevent Congress from resurrecting its threats to impose import tariffs,” Laidi said.
Daniel Katzive, senior currency strategist at UBS, said: ”While this may be an effort by the Chinese authorities to signal their willingness to allow more yuan appreciation ahead of [this week’s] US-China dialogue meetings in Washington, the fact is that the previous 0,3% band was not even being fully utilised, and [so this] will not necessarily result in a firmer yuan.”
Mark Williams, international economist at Capital Economics, said that despite a ”triple whammy” of measures, little had changed. ”The implications for other currencies are therefore minimal. And, once the dust has settled, the threat of protectionism will be undiminished.”
Beijing also sought to dampen growth and limit speculation on the Shanghai stock market by raising the one-year lending rate by 0,18 percentage points to 3,06%. Reserve requirements on banks were raised by half a point to 11,5%.
Until yesterday’s move, interest rates for savers in China were lower than the inflation rate, encouraging people to borrow money to invest in the stock market. With share prices in Shanghai up 51% so far this year, the move was thought unlikely to halt the heavy investment in the equity markets. But the action by Beijing was seen as evidence that the authorities are concerned about the recent wave of speculation. China’s economy grew by more than 11% in the first three months of the year and despite the tightening of policy, analysts expect the pace of growth to remain fast until the country hosts the Olympic Games next summer.
The People’s Bank of China has now raised interest rates four times in little more than a year and reserve requirements eight times since June 2006. — Â