EU Backs China's Gradual Yuan Moves, Splits With U.S.
(Update3)
April 3 (Bloomberg) -- The European Commission backed China's
policy of switching to a more flexible exchange-rate system at its
own pace, rebuffing U.S. calls for faster steps to boost the yuan,
according to a confidential document.
The commission, the European Union's Brussels-based economic
watchdog, warned that sudden moves to strengthen the Chinese yuan
as demanded by some U.S. officials could further weaken the dollar
against the euro.
``China should introduce greater exchange-rate flexibility in a
gradual manner,'' according to a document obtained by Bloomberg
News. A gradual move would lessen the risk of the dollar, euro and
Japanese yen ``overshooting'' on the markets.
The U.S. is pushing for a more flexible exchange-rate system to
boost American exports and erode the U.S. trade gap with China,
which reached a record $201.6 billion in 2005. U.S. officials
complain that China keeps the yuan, a denomination of the renminbi,
artificially depressed so Chinese products are cheap in the
marketplace.
The yuan has appreciated 1 percent against the dollar since China
on July 21 replaced a decade-long peg to the dollar with a basket
of currencies and let its exchange rate rise 2.1 percent
immediately.
No. 1 Customer
The U.S. is the biggest market for the 12 European countries using
the euro. European exports of 184.8 billion euros ($223 billion) to
the U.S. last year dwarfed exports to China of 43.5 billion euros.
Europe's trade deficit with China, at 74.1 billion euros in 2005,
was less than half the U.S. level.
``An abrupt de-pegging of the renminbi, and possibly other Asian
currencies, from the dollar could give rise to a sudden reversal of
Asian capital flows into the U.S., which might risk an excessive
additional downward movement of the dollar against the euro,'' said
the commission document, which was prepared for an April 6 meeting
of European finance ministers in Vienna.
Finance chiefs from Asian countries including China and Japan will
meet the EU ministers on April 7 and 8.
``The Europeans are concerned that should China allow more
appreciation in the yuan that we could see an acceleration of
dollar weakness, and that could spill over into major markets, and
we could see European currencies strengthening,'' said Sabrina
Jacobs, a currency strategist at Dresdner Kleinwort Wasserstein in
London.
The euro bought $1.2063 at 3:15 p.m. Brussels time, compared with
an average of $1.2453 last year.
U.S. Pressure
The U.S. raised the pressure on China last week, with Treasury
Undersecretary for International Affairs Tim Adams saying the
Chinese government has been ``far too cautious'' on currency policy
and should switch to a more flexible system now.
With congressional elections in November, the U.S. has taken the
lead in calling for a currency revaluation in China, which has
leapfrogged the U.K. to become the world's fourth- largest economy.
Steps so far have ``not satisfied the demand of U.S. policy
makers,'' said the commission document.
U.S. Senators Charles Schumer and Lindsey Graham are calling for
27.5 percent tariffs on Chinese imports, though last week they
delayed a vote on the proposal until September. Some U.S. analysts
predict legislation punishing China for the undervalued currency
will pass before the November election.
``There has been more aggressive rhetoric from the U.S., but
rhetoric is not going to make the Chinese move faster,'' said
Marios Maratheftis, a currency strategist in London at Standard
Chartered Plc, a bank that makes about two-thirds of its profit in
Asia. ``They're on the correct path with a gradual strengthening of
the yuan. Gradual is the key word.''
Currency Manipulation
Separately, the U.S. Treasury is considering whether to brand China
a currency manipulator for the first time in more than a decade.
That ruling may be delayed until after Chinese President Hu
Jintao's April 20 visit to Washington, Adams said last week.
The yuan declined to 8.0199 against the dollar today in Shanghai,
from 8.0172 on March 31, according to data Bloomberg
compiled.
European governments have sought to whittle away at China's trade
advantages by imposing tariffs or filing complaints at the World
Trade Organization. Last month the EU slapped duties on some
Chinese leather shoes, following last year's decision to set limits
on Chinese clothing imports.
Pushed by French President Jacques Chirac, EU leaders last year
considered dropping a ban on arms sales to China that was imposed
after the 1989 Tiananmen Square crackdown against pro- democracy
demonstrators. Pressure from the U.S. and a change in government in
Germany led the EU to keep the ban in place.
In a rare joint move, the U.S. and EU last month threatened to take
China to the WTO for setting tariffs on car parts that raise costs
for foreign auto factories in China.
Forecasting Difficulties
Looking at U.S.-European economic relations, the commission
document said it is ``unclear'' whether the dollar will continue to
recover or weaken against the euro this year. While interest rates
and economic growth remain in the dollar's favor, the end of the
phase of U.S. interest-rate increases could benefit the euro, the
document said.
Some Asian governments, flush with dollars in their reserves, may
let their currencies strengthen this year as an insurance policy
against future crises, said the document, prepared by the
commission's economics department and dated March 17.
Also weighing on the currency markets is the risk of a widening
U.S. current-account deficit along with increasing surpluses in
Asia, the document said. The result may be a ``disorderly''
realignment of the world's major currencies.
``There remains the risk that, as imbalances continue to widen, the
likelihood of a disorderly correction increases,'' the document
said. ``Even if a disorderly correction is the less likely
scenario, it may involve very large costs.''