Emerging economies, smarting under rampant currency appreciation that is hindering their efforts to export their way to recovery, are finally daring to join a chorus of protests against China’s weak yuan.
Complaints about China’s currency usually come from the world’s rich nations but at last week’s G20 meeting, there were signs that developing states, Beijing’s allies on issues such as climate change and International Monetary Fund (IMF) reform, may also be starting to turn on it.
Brazil’s Finance Minister Guido Mantega — part of the ”Bric” group that also includes Russia, China and India — said he wanted to bring up the disparity between fixed and floating exchange rates at the G20. A source in his department was more blunt — saying China’s managed rate regime gave it too much of a competitive edge when it comes to exports.
”What is a concern is China’s fixed exchange rate,” the Brazil source told Reuters at the meeting of the Group’s finance ministers and central bankers. ”The whole problem is China.”
”Either all countries should have a fixed exchange rate or all should have a floating exchange rate.”
But more public criticism may not make much difference.
The United States and other major Western powers have toned down the public pressure on the Chinese this year — partly because they believe Beijing gets more, not less, obstinate in the face of external pressure.
Chinese Finance Minister Xie Xuren shrugged off the noises from the Brazilians and others this weekend, rather pointing to the need for other major economies to work to maintain their currencies’ value to avoid destabilising the world economy.
”All countries should pay attention to the sustainability of their fiscal policies and economic growth, and take timely and effective steps to address potential risks, including inflation,” the Xinhua news agency quoted Xie as saying.
China may allow the yuan to gain a bit next year if world economic recovery stays on course. But only if Beijing is certain current recovery signs are genuine and not merely due to inventory restocking and the emergency government stimulus.
”A stronger yuan is likely and hugely desirable over the medium term but for the time being, other emerging markets will probably remain frustrated,” Manik Narain, strategist at Standard Chartered, one of the biggest banks operating in Asia.
”We do not expect any changes in China’s fx policy until the second half of 2010. Policymakers there appear to think the recovery is only partly entrenched and while domestic demand is picking up nicely the external sector remains under pressure with exports, still in negative territory year-on-year.”
Crippled
Brazil, whose exporters have warned publicly they are losing share to Chinese rivals, is saying what developed countries have said for years — the yuan-dollar exchange rate is too weak and the yuan should be allowed to float more freely.
Most emerging currencies have gained this year due to huge inflows to financial markets and booming commodity prices. Some currencies, such as Brazil’s real and South Africa’s rand, have risen 30% versus the dollar in 2009 and a number of central banks have had to intervene almost daily to curb rises that would cripple producers.
China with its fixed rate has no such problem — in fact after three years of allowing the yuan to rise, it effectively repegged it in mid-2008 to help exporters.
Russian Finance Minister Alexei Kudrin stopped short of criticising China at the G20 but in a swipe at the weak yuan, he said it was wrong to ”create hothouse conditions for some companies by artificially controlling the exchange rate”.
”Today there is such hot debate on the exchange rate policy of China, which keeps a controlled exchange rate … a correct exchange rate is one that is determined by objective factors and not the action of the central bank,” Kudrin told reporters.
Pressure building
Pressure is possibly strongest on Asia’s export-dependent economies such as Korea, Taiwan and Indonesia where central banks are waging a daily battle to tame currency strengthening.
Indonesia’s Finance Minister Sri Mulyani Indrawati said Asian nations were worried about the yuan. Indonesia’s rupiah is up about 16% so far this year against the dollar.
”We need to discuss this in a manner that China recognises that change needs to be done,” Indrawati told Reuters.
Unease is growing due to several reasons. First, there are signs the global economy may be picking up, meaning there is potential for export growth. Second, emerging nations have hugely boosted trade with China, mainly selling it oil and metals destined for its factories — but they now need to go a step further.
”What surprises me is that it has taken so long for emerging nations to start lobbying China on currency policy,” said Richard Segal, analyst at Knight Libertas in London. ”The emphasis on trade with China is on commodities. If the yuan were stronger, emerging economies could be marketing semi-finished and consumer goods to a larger degree [to China].” — Reuters