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Currency pressure builds on China
CNN's Asia Business Editor Geoff Hiscock
(CNN) -- China will come under more pressure over the value of its currency at a summit meeting with European Union leaders in Beijing Thursday. European Commission President Romano Prodi will push President Hu Jintao to gradually loosen the Chinese yuan's peg to the dollar, according to an official from the EU. The EU move comes after U.S. Commerce Secretary Don Evans delivered a blunt warning Tuesday that China must move faster to open its markets or face a backlash in the United States. China's currency has been pegged at about 8.28 yuan to the dollar since 1993 -- a rate that U.S. officials claim makes the Chinese currency too cheap and thereby gives China an unfair trade advantage. European and U.S. exporters believe the yuan should be revalued, but China says the peg gives stability both to China and the Asian region in general.
China runs massive trade surpluses with the West -- an expected $130 billion with the United States this year, and $53 billion with the 15-nation EU last year. With China's economy growing at about 8 percent a year and overseas investment still pouring into the country, that gap is likely to increase. U.S. Treasury Secretary John Snow called for more yuan flexibility during a visit to Beijing in September, and President George W. Bush followed that up during his Asian trip earlier this month to attend the APEC summit in Bangkok. China has been resisting the U.S. pressure and is unlikely to change its stance for the scheduled meetings with the EU delegation on Thursday. Beijing's view is that a move to greater yuan flexibility is desirable, but it will not happen in the short term. Hu said at APEC that the issue needs more study. On Monday, the China Daily newspaper quoted central bank governor Zhou Xiaochuan as saying China will "perfect the renminbi (yuan) exchange rate mechanism and maintain the basic stability of the renminbi exchange rate at a reasonable and balanced level". The commentary coincided with the visit by Evans. In a speech to the American Chamber of Commerce in Beijing on October 28, Evans said China was moving "far too slowly" in the transition to an open, market-based economy and time was "running out". He warned that U.S. patience was wearing thin. "The American market will not remain open to Chinese exports indefinitely, if the Chinese market is not equally opened to U.S. companies and American workers," he said. Analysts such as Morgan Stanley's Hong Kong-based chief economist Andy Xie say the yuan peg to the dollar is probably still the most appropriate currency policy for China. Xie said recently that while China was becoming the world's factory, prices for tradable goods were still determined in the world's largest and most open market, the United States. He said the yuan peg removed currency risk for suppliers -- many of whom are U.S. and European companies -- based in China. In Brussels on Tuesday, an EU official said Prodi would bring a message that China needs to continue its process of economic reform. "He understands that there remain a number of imbalances in the Chinese economy. These include unpegging the renminbi (yuan) from the dollar over time, but he understands it cannot be done from one day to the next," the official told reporters, according to Reuters news agency. Asked whether Prodi would explicitly raise the currency issue, the official said: "Yes, it's one point on the agenda." She later said the EU was seeking greater flexibility in the Chinese currency's exchange rate. Along with Prodi, the EU delegation will include Italian Prime Minister Silvio Berlusconi, whose country holds the rotating EU presidency, EU foreign policy chief Javier Solana and EU Trade Commissioner Pascal Lamy. They will meet Hu and hold talks with a delegation led by Prime Minister Wen Jiabao.
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