Wen: China Will Not Bow To Pressure To Revalue
Yuan
Chinese premier Wen Jiabao said that China will not bow
to strong external pressure from governments and currency
markets to revalue the yuan upwards against the dollar,
but will choose the time to make adjustments to the peg
which is now fixed at 8.28 yuan to the dollar.
The backdrop to the comments was at the ASEAN summit
in Vientiane, Laos. At the summit, the eight ASEAN countries
committed themselves to a tariff-free free trade zone,
and to tighter economic ties with China by 2010. The eventual
goal is full economic integration with the Chinese economy
and Chinese consumers, with energy and raw natural resources
and some services provided by ASEAN.
The statement amounted to a rejection of pressure from
the US government, which is supporting a fall of the US
dollar against other major currencies, especially the
euro and yen. The Chinese refusal to let the yuan rise
means that while US-made exports have been able to gain
ground against Japan-made and European exports, they are
unable to gain ground against Chinese-made exports.
The Chinese policy is that the government will not loosen
the peg while western governments and currency traders
are betting for a yuan rise. Instead, the yuan will rise
when the external pressure falls off. The policy, in effect,
says: "The more pressure, official and speculative,
you put on us (China), the less chance there is for a
rise because we don't want to be seen to be bowing to
external pressure."
Already, currency traders are backing off on yuan forward
trades in Singapore, which amount to bets on yuan appreciation.
China has also committed to a major infrastructure projects,
including a railway linking Bangkok and Kunming in southwest
China, to be completed by 2007. This will be later linked
to a new railway line ending in Singapore.
It will be interesting to see how these projects will
be financed, and if bonds are issued, what currency they
will be denominated in. Early signs suggest that the fall
of the dollar will accelerate this ASEAN-China integration,
and the rise of a "yuan bloc" in Asia. Already
there are signs that Europeans are more receptive to yuan-denominated
debt than US treasury bonds.
The current situation leaves Japan and the yen, as the
odd man out in Asia. Eventually, the Japanese will need
to decide what direction they want
to go.
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