East Asia needs a stable yuan: banker

by Takashi Kitazume

Despite mounting international pressure for revaluating the yuan, a sharp fluctuation in the currency would only destabilize the Chinese economy, whose rapid expansion has aided not only Asian growth but global growth as well, a Chinese banker told a recent symposium in Tokyo.

Zhang Yanling, executive vice president of the Bank of China, told the Nov. 18 symposium at Keidanren Kaikan that it is correct for the Chinese government to stick to its policy of maintaining stability in the yuan’s exchange rate. Yuan appreciation will not solve the economic woes of major industrialized countries like the United States and Japan, she said.

Zhang was one of the participants at a symposium jointly organized by the Keizai Koho Center, the Institute for International Monetary Affairs, and the Sankei Shimbun, on the need for a stable currency regime in East Asia. The BOC is China’s oldest lender.

One of the key topics was the growing call for change in China’s exchange rate regime, which effectively pegs the yuan to the dollar.

Some critics say China is using the regime to keep its currency undervalued and its exports competitive. Zhang argued that yuan appreciation would only have a negative impact, because China, which would be hurt by the sharp fluctuation, has been one of the main engines of world growth.

“The remarkable export recovery of most countries in Asia has clearly been driven by the growing appetite of the Chinese market, instead of benefiting from the small economic rebound of the U.S. economy,” Zhang said, citing Chinese customs data showing that annual growth in China’s imports from the rest of East Asia is more than twice that of the rest of the world.

Although China accounted for only 4 percent of global GDP in 2001, it contributed 17.5 percent of the 2 percent growth in the world economy, she pointed out.

Zhang noted that products made by foreign-owned corporations and their joint ventures account for more than half of China’s total exports, meaning the home countries of such firms share the trade income of China. This fact will serve to rebut the oft-repeated argument that China is exporting deflation to other countries, she added.

She said it is unreasonable to blame the huge U.S. trade deficit, for example, on the China factor alone, adding that a stronger yuan will not solve the problem. “Given the huge gap in labor costs between China and the developed countries, would a 10 percent appreciation of (the yuan) really help?”

Zhang also pointed out that China’s exports to Japan have mainly consisted of preliminary and labor-intensive products, which she said have only “minimal” impact on the Japanese economy. Yuan appreciation “cannot solely change the basic structure of China’s trade with the U.S. or Japan,” she added.

On the other hand, she said, a sharp fluctuation in the yuan’s exchange rate will have a serious negative impact on the economic stability of China, which has had to confront a host of structural problems of its own, including high unemployment and large gaps in wealth, between urban and rural areas.

Zhang argued that a lesson should be learned from Japan’s experience after the 1985 Plaza Accord, which led to a sharp appreciation in the yen and eventually caused the formation of the asset-inflated economic bubble of the late 1980s.

Il Sakong, chairman and CEO of the Institute for Global Economics of South Korea, agreed with Zhang that maintaining China’s economic stability is critical, not only for China itself but also for the rest of the world — particularly East Asia.

Therefore, Il said, it is important for China to implement a “very well-sequenced program” to open up its financial sectors, in particular its capital account.

In this regard, China can learn from the failures of its neighbors, such as South Korea, which in the mid-1990s opened up its capital markets in “wrong sequence,” said the former South Korean finance minister. Such a mistake should not be repeated by other countries in East Asia, he said.

Il also said China is not yet ready to move toward a floating exchange rate regime “because China still does not have a sound and prudent financial regulatory and supervisory infrastructure” that is up to international standards.

Haruhiko Kuroda, Japan’s former vice finance minister for international affairs and a special adviser to the Cabinet, observed that at the current exchange rate of 8.28 yuan to the dollar, the Chinese currency is perhaps “30 percent or more undervalued.”

Chinese monetary authorities maintain the yuan’s dollar peg through strict capital control and massive intervention in the currency market, he explained. However, such a policy will result in China accumulating huge foreign currency reserves, which in turn will pose two major problems in the future, he said.

One is that accumulation of dollar reserves could expose China to a serious foreign-exchange risk, Kuroda said. Another is that China could end up losing control of its money supply.

Although China does not seem to face an immediate danger of inflation, its money supply is already growing at a rapid pace and real estate prices are rising — an indication of an economic bubble, he warned.

Kuroda also noted that despite China’s contributions to global growth, a sharply undervalued yuan could pose a serious threat to the smooth trade and investment relations between China and its economic partners.

Therefore, he said, China should quickly come up with a medium-term strategy for adjusting the yuan’s exchange rate.

Kuroda concurred with South Korea’s Il that floating the yuan is still too dangerous an option for China. Instead, he suggested China adjust the yuan’s exchange rate gradually — by 7 percent to 10 percent each year.

Fujio Cho, president of Toyota Motor Corp., took a different tack for addressing currency stability, discussing it from the viewpoint of the automaker’s global operations.

Until the early 1990s, Toyota’s earnings structure had been extremely vulnerable to exchange rate fluctuations, but the firm has since substantially reduced that risk by adopting a policy of increasing local production where there is demand, Cho told the audience.

With China one of the automaker’s most promising markets, Toyota is moving to expand auto production there to meed growing demand, Cho said. Since it will not rely on exports from Japan, Toyota’s Chinese operation will be little affected by yuan exchange rate fluctuations, he said.

Still, a certain level of foreign-exchange risk will remain, since Toyota will need to keep some of its core production — as well as research and development operations — in Japan, Cho said.