China Resists Pressure to Float
Following US Treasury Secretary Snow's remarks last week
calling for a float of the RMB, or Chinese yuan, China
has stepped up its high-growth export policy following
the SARS crisis.
Chinese authorities have said that they will continue
to hold to the US$1 to 8.28 yuan exchange rate, and have
told China exporters that they will process import tax
refunds for goods processed for export from China at a
faster rate, helping the cash flow of Chinese exporters.
Although President Bush has said that he favors a strong
dollar, currency markets have paid closer attention to
the remarks of Mr. Snow, who seems to favor a weaker dollar
to help American exports. Many American exporters, and
their supporters, want a stronger Chinese yuan so that
American exports can be more competitive on international
markets compared to Chinese exports. They feel that since
China has some of the lowest manufacturing costs in the
world, the Chinese yuan, which is pegged to the dollar,
enjoys an unfair advantage in international markets.
From China's perspective though, there are other issues.
China's banking sector has a very high rate of bad loans,
with international credit rating agencies estimating that
as much as 50% are non-performing loans. China denies
this, saying that the percentage is more like 25%. Also,
as the economy changes from a largely state-owned economy
to a largely privately-owned economy, unemployment is
a major problem. For the Chinese government, high unemployment
carries with it the threat of social instability. While
western politicians see this as a show of China's economic
might, many Chinese see this as the minimum necessary
to make a transition to a market economy and keep society
stable. In February, before the SARS crisis became public,
the Chinese government made a public commitment to keep
the rate of GDP growth at a minimum of 7%.
Following the SARS crisis, Lehman Brothers released a
report estimating China's GDP growth this year at 8%,
which seems very high considering the effect of the crisis.
This seems to indicate that manufacturing, which is a
large part of the Chinese economy, was not substantially
effected and that China's domestic retail sector, while
showing signs of strong growth in certain areas such as
auto sales, is still comparatively young and takes a smaller
part of the GDP pie. This also indicates China's economy's
heavy reliance on export manufacture to help it face its
current challenges.
For companies selling goods and services in China, this
also indicates that the Chinese government continues to
feel that Chinese companies are still not able to compete
effectively with their foreign counterparts in the China
market.
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