Vol. I Issue. 47
Akhilesh B Variar
In the recent years, especially in the post financial crisis era, there has been a surge in politicisation of economic issues, changing governments in continental Europe, republican-democratic disagreement over debt reduction deals, and political outcry over audit reports. The consequence of politicisation has invariably been the worsening of the economic crisis. Arguably one of the most important issue has been that of the supposed ‘trade distorting, global imbalance creating, grossly unfair devaluated exchange value of the ‘People’s currency’ — the Renminbi (RMB).
Its importance stems from dire predictions of the Renminbi triggering a competitive devaluation of currency better known as ‘currency wars’ possibly threatening an already battered global economy.
The economics of the issue has been overshadowed by high pitched politicking and this article seeks to rediscover from a generalised and macroeconomic viewpoint, the main economic fundamentals, the recent history of Chinese currency appreciation or lack of it and from a distance examine the currency-trade link. The scope of impact of Chinese currency policies will be assessed and the conclusion will be in the context of Chinese economic transition and any obvious inherent contradictions either in China’s own economy, the global economy or the premise itself.
Prior to 1994, China had a dual exchange economy — a fixed official rate system used by the government and a swap market based rate system used by exporters and importers. Access to foreign exchange was limited to restrict imports. The official exchange rate with respect to the dollar was 5.77 yuan and in the swap markets it was 8.7 yuan. In 1994 these were unified to a rate of 8.7 yuan and allowed to appreciate to 8.28 yuan in 1997, which was then kept constant till 2005.
This was based on a policy of pegging the RMB to the US dollar ($), the rationale given was to promote stable investment and trade. The peg was maintained by buying or selling dollar related assets in exchange of yuan which is the rupee equivalent of the Chinese currency Renminbi. The yuan had current account convertibility but no capital account convertibility and therefore was not easily available for capital investments. The dollar peg meant that when dollar depreciated or appreciated against other currencies the RMB would too. Given that China and U.S together, for instance in 2005, accounted for 15 % of global export, economist Paul Krugman’s conclusion on the pegging hurting the poor countries was pertinent. Whereas under a floating exchange rate system the Chinese currency rate would have been dependent on the relative demand of the country’s goods and assets, in the case of pegging it was fairly constant and does not reflect the great trade surpluses that the Chinese have had in recent years.
In 2005, China announced reform and decided to base the RMB on market supply and demand based on a basket of currencies (composition of which was not revealed).Analysts however suggested that the basket was weighted in favour of the dollar and that this was only just short of pegging, as was demonstrated by stability shown by RMB against the dollar in the 2008-2010 period. After letting the currency appreciate to 6.83 yuan China halted its appreciation in mid 2008. It is again suggested by analysts that this was due to the global crisis and the consequent reduction in demand for Chinese products.
In June 2010, the People’s Bank of China declared the resumption of currency appreciation but ruled out one-time revaluations, citing the need to avoid sharp fluctuations and maintain stability. It seemed timed in a way which suggested that the Chinese were trying to avoid international scrutiny ahead of the G20 Toronto summit. Since then the appreciation has continued, according to most analysts, at an excruciatingly slow pace.
It is true, for an export-led growth model of a country which arguably draws its political legitimacy from economic gains, the larger issue of Internal Balance and External Balance are inextricably linked (James Mead 1951). This meant that Chinese currency appreciation could only set a pace which could allow for an orderly transition to reorient industry to cater to internal demand while also ensuring that its largely underpaid workforce, a natural offset of an export-oriented growth model, also achieved the purchasing power to sustain the demand.
However, while all this facilitates an orderly transition within the economy, the brunt of this transition is being borne by China’s trading partners, both at a bilateral trade and at a globally competitive levels. This is substantiated by Cline and Williamson study which estimates Chinese currency, along with some other East Asian countries and Switzerland, to be undervalued and in need of upward revision. India’s own trade deficit with China continued its upward trend to $20 billion this year.
So why, despite an ‘obvious’ currency manipulation policy leading to burgeoning trade deficits and ‘global imbalance’, is no concerted action being taken against the perpetrator?
The answer lies in a grey area which has moorings further back in history. The post war monetary Bretton Woods systems involved administered exchange rates with changes only with prior permission of IMF (read US). In 1971, with the US expressing inability to maintain the gold convertibility of the dollar, all major powers started to float currency and some emerging markets pegged to the dollar. However they now did this without effective surveillance of the IMF. The value of the peg therefore was viewed as a ‘sovereign’ decision in which other countries including issuers of reserve currency are not allowed to interfere.
The IMF Articles of Agreement, Article IV, Section 1(iii), weakly states that a member must “avoid manipulating exchange rates or the international monetary system in order to prevent effective BOP adjustments or to gain unfair advantage over other members”.
The 90s were a different era altogether. The IMF (read US) could be much more persuasive, in the current scenario however, such a possibility is remote. This is most evident in the 2005 Government Accountability Report of the US Treasury department citing its inability to positively determine ‘currency manipulation’ by the Chinese. This is the same Treasury that cited China as a currency manipulator five times from 1992-1994, ultimately forcing it to do away with the dual exchange rate system. However the argument of the treasury department is also that, since there is no attempt to intentionally depreciate the currency and only a slow and halting appreciation, the legal basis for any complaint would be fragile. It is difficult to see newly begun attempts at global exchange rate realignment agreements taken seriously, especially in the present politico-economic climate. Any such attempt will be seen as a political move aimed solely at China and might not find the requisite support.
China, meanwhile, continues to march ahead, with accumulated forex reserves growing from $403 billion in 2003 to $2.85 trillion in 2010, World economic outlook predicting an increase in current account surplus to $874 billion by 2016 from $297 billion 2010.
So are there contradictions in the Chinese growth model? Fundamentally yes, and the transition will be a difficult one. Is there a global imbalance? Raul Prebisch, Dos Santos and Immanuel Wallerstein, proponents of the ‘Dependency theory’ would have said – was there ever a balance? Is the premise faulty – to the extent that undervalued Chinese currency is hurting economies all over? Yes, but to the extent that it is this undervaluation that is the only cause of the massive trade deficits and job losses – questionable.
It is probably time that we realized ground realities, set 6% IMF vote transfer jokes apart and started seriously working towards revamping of the global economic governance structures.
But then it is election season – and so until after, with no real political will to make changes, the Renminbi is only likely to figure prominently in the rhetoric as being “trade distorting, unemployment generating, global imbalance creating and grossly unfair”….
(The author is a Research Assistant at Observer Research Foundation, New Delhi)
China, Venezuela sign nine agreements
China and Venezuela ended their annual high level talks on November 24 by signing energy, telecom and agriculture agreements. Both sides also signed a memorandum of understanding which allows China to build coke combustion engines in Venezuela’s northern industrial areas.
Telecommunications companies of the two countries agreed to enhance technological and infrastructure cooperation and start feasibility studies on satellite television system for civil use in Venezuela. The agricultural companies agreed on agriculture products exchanges, Venezuelan farmers’ training and technological transference. A letter of intent on conducting feasibility studies on a hydroelectric project of energy supplies for south Venezuela was also signed.
Source (s): Xinhua New Agency, November 25, 2011.
China Ghana to strengthen military ties
Chinese Defence Minister Liang Guanglie and his Ghanaian counterpart Lt. Gen. Joseph Henry Smith have agreed to strengthen friendly military ties between the two countries. Defence departments and military leaders of China and Ghana have been attaching great importance to developing a relationship between the armed forces of the two countries in recent years.
According to Chinese Defence Minister, mutual political trust and economic and trade cooperation have been deepened in recent years between the two countries, which have supported each other on international affairs. The Chinese Defence Minister also said that China would like to make more efforts together with Ghana to continue the existing friendly relations and promote cooperation on all levels and in all sectors for the benefit of the two peoples.
Source (s): Xinhua News Agency, November 24, 2011.
China, Japan to boost mutual trust
China and Japan pledged to boost political trust between the two countries during Japanese Foreign Minister Koichiro Gemba’s visit to Beijing on November 23. According to Chinese Foreign Minister Yang Jiechi China is ready to make joint efforts with Japan to further advance their strategic relationship of mutual benefit in a sustainable way.
Foreign Minister Koichiro Gemba was in Beijing to pave way for Prime Minister Yoshihiko Noda’s planned visit to China in December. If the trip is made, Mr. Yoshihiko Noda will be the first Japanese prime minister to visit China since the Democratic Party of Japan came to power in 2009.
Source (s): China Daily, November 23, 2011.
PLA Naval Exercise in Western Pacific
The Chinese Ministry of National Defence issued a statement recently informing that the People’s Liberation Army’s Navy would conduct training exercises in the western Pacific in late November. The Ministry clarified that the exercise would not be directed against any country and will be in accordance with relevant international laws. It also warned that the training exercise should not be hindered as it was China’s lawful right.
Source (s): Xinhua News Agency, November 24, 2011.
PLA sets up Strategic Planning Dept.
The PLA established a Strategic Planning Department in Beijing on November 22 for strategically managing the military. The department which was approved by President Hu Jintao and the Central Military Commission would study key strategic issues facing the military. The department will address issues concerning PLA’s general departments and implement military’s development plan. It will also be responsible for control of PLA’s strategic resources.
Source (s): Defence News, Chinese Ministry of National Defence, November 22, 2011.Trade and Investment
Plans to invest $1.7 billion in US strategic sectors
Visiting U.S. commerce secretary John Bryson said in Beijing that China planned to spend 1.7 trillion U.S. dollars on strategic sectors in the next five years. These sectors include alternative energy, biotechnology, advanced equipment manufacturing, and new energy vehicles.
Source (s): Reuters, 22 November, 2011.
Sino-ASEAN trade projected at $400 billion
Premier Wen Jiabao on a visit to Brunei suggested that China’s trade volume with the Association of Southeast Asian Nations (ASEAN) was likely to reach $400 billion this year. According to official figures, trade between China and ASEAN reached $295.9 billion in the first 10 months of this year. China has become ASEAN’s top trading partner, while ASEAN replaces Japan as China’s third-largest trading partner.
Wen added that there was huge potential for Beijing to beef up its economic ties with ASEAN as deals with China only account for 11 percent of its overall trade.
FISCAL AND MONETARY POLICY
The World Bank on Nov 23rd forecast a growth of 9.1 percent for China in 2011, followed by a slower growth of 8.4 percent in 2012. Growth is expected to slow as external demand weakens and China pushes forward its own structural adjustment towards economic growth driven more by domestic demand, according to World Bank’s latest East Asia and Pacific Economic Update.
Meanwhile JP Morgan Chase & Co. economists reduced their full year growth estimate for China to 9.4 percent from 9.6 percent.
Source (s) Caijing.com.cn, 22 November, 2011.
Possible monetary easing
Monetary-loosening measures by the Chinese government are imminent, and the tone of its macro policy may change during the nation’s annual Central Economic Work Conference, which is scheduled to begin in December, according to analysts.
Six rural credit cooperatives in Zhejiang province will see a 50 basis point reduction in the reserve-requirement ratio (RRR) to 16 percent. The move is being viewed by some observers as a signal of lowering the RRR for some other lenders, and indicates limited loosening of monetary policy.
There is the possibility of a cut in the reserve-requirement ratio (RRR) in the first quarter (of 2012), and the tone of macro policy will change during the Central Economic Work Conference,” said Huang Jifa, deputy head of investment banking at Industrial and Commercial Bank of China Ltd, as quoted by Reuters.
The possibility of a selective lowering of the RRR for some banks, or even a broader cut in the RRR before the end of this year, cannot be ruled out, because the growth of M2 – a broad measure of money supply – and total social financing are slowing quickly. possibility of a selective lowering of the RRR for some banks, or even a broader cut in the RRR before the end of this year, cannot be ruled out, because the growth of M2 – a broad measure of money supply – and total social financing are slowing quickly.
Some analysts however contest the view suggesting that while fiscal policy will play a bigger role in supporting growth, monetary policy was likely maintain a neutral stance for the time being.
Source (s) China Daily, 25 November, 2011.
Energy deals with Turkmenistan and Brunei
Energy-rich Turkmenistan will increase its natural gas deliveries to China by two-thirds under an agreement with leaders of the two countries vowing to establish a long-term and stable strategic energy morning, will increase annual gas deliveries by 25 billion cubic meters a year, bringing the annual total to 65 billion cubic meters “in the near future”, The figure – 65 billion cubic meters – is equivalent to more than half of China’s entire natural gas consumption last year.
Hu also pledged to deepen energy cooperation with Turkmenistan and establish “a long-term and stable strategic energy partnership” following the success of a natural gas pipeline between the two countries, which became operational in 2009. The pipeline passes through Central Asia pipeline, originating in Turkmenistan and goes through Uzbekistan and Kazakhstan before connecting to China’s second west-east gas pipeline. The latter line starts in the Xinjiang Uygur autonomous region and ends in Hong Kong, with a total length of 8,704 kilometers (km). There are plans to build the third and fourth pipelines in the future to further expand gas supply, in particular to the middle, southeastern coastal and southern parts of China.
In Brunei Premier Wen Jiabao raised specified proposals to deepen economic ties including cooperation in offshore oil and gas exploration, as well as upstream and downstream energy cooperation. Brunei is the third-largest oil exporter in Southeast Asia and the fourth-largest natural gas exporter in the world.
China National Offshore Oil Corp (CNOOC) also signed a deal with Petroleum Brunei for “gas and oil commercial cooperation”. No details of the two documents were released
Source (s) China Daily, 25 November 2011.
• Priyanka Mehrotra
• Rahul Prakash
• Akhilesh Variar