Chinese premier wants U.S. reassurance about dollar

Submitted by cpowell on 09:27AM ET Sunday, March 14, 2010. Section:

By Michael Forsythe, Eugene Tang, Li Yanping, and Kevin Hamlin
Bloomberg News
Sunday, March 14, 2010

"I don't think the yuan is undervalued," Wen said at a press conference in Beijing marking the end of China's annual parliamentary meetings. Dollar volatility is a "big" concern and "I'm still worried" about China's U.S. currency holdings, he said.

Wen urged America to "take concrete steps to reassure investors" about the safety of dollar assets, repeating concerns that he expressed a year ago, sparked by a growing U.S. fiscal deficit. Treasury Department figures show China's holdings of Treasury securities dropped for a second month in December to $894.8 billion.

Wen’s comments come as lawmakers in the U.S. call for retaliatory trade measures to compel appreciation. On March 11, President Barack Obama urged the nation to move toward a more "market-oriented exchange rate." Economist Paul Krugman said March 12 that global growth would be about 1.5 percentage points higher if China stopped restraining the value of its currency and running trade surpluses.

"This is a sign that there will be no one-off revaluation in coming months," said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong. "China's top policymakers do have their own currency reform plans but coercion from other countries will do disservice to this cause."

The Chinese premier said that pressure for currency gains can amount to trade "protectionism," adding that "I'm a strong supporter of free trade."

He echoed central bank Governor Zhou Xiaochuan in saying that China needs to carefully time any exit from anti-crisis policies, which have included pegging the yuan to the dollar since July 2008.

Sovereign-debt problems and high unemployment around the world could send the global economy into a second, or "double dip" downturn, the premier said. In China, inflation, combined with wide income gaps and official corruption, could lead to social instability "and even affect the government's hold on power."

Wen reiterated that the nation will keep the yuan "basically stable" and maintain a moderately loose monetary policy and a proactive fiscal stance to consolidate an economic recovery, adding that it's "essential" for the timing of any change to be appropriate.

Twelve-month non-deliverable yuan forwards climbed 0.3 percent to 6.6290 per dollar last week, according to data compiled by Bloomberg. The gain was the most in two months.

The yuan rose 21 percent between July 2005 and July 2008, before the government halted its advance to protect exporters. The central bank may allow a gain of 3.4 percent to 6.6 yuan per dollar by the end of this year, according to the median estimate in a Bloomberg News survey of 25 analysts.

"We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency, because that won't help renminbi exchange-rate reform," Wen said, using another word for the yuan. "A stable renminbi exchange rate in the midst of the global financial crisis has played an important role in the global economic recovery."

The yuan didn't fall during the worst of the global crisis, between July 2008 and February 2009, Wen said, adding that the currency's real effective exchange rate rose 14.5 percent. He didn't specify against which currencies. Wen also reiterated pledges to continue to reform China's exchange-rate mechanism.

In contrast, Krugman, a Nobel Prize-winning economist, said China's currency policy has a "depressing effect" on economic growth in the U.S., Europe, and Japan, as measured by gross domestic product. If the yuan were not undervalued, it would have a "significant" impact on the global recovery, he said in a March 12 speech in Washington.

"If we could get some change in China's currency policy, it would help the world," Krugman said.

Wen highlighted strains in China's relationship with the U.S. after Obama's meeting with the Dalai Lama and American arms sales to Taiwan, saying that the U.S. was responsible for the tension. He expressed hope for an improvement in "our most important diplomatic relationship."

Asked about increasing dissatisfaction among foreign businesses in China over the investment climate, the premier sought to reassure international investors.

"China will unswervingly pursue the policy of opening up to the outside world," Wen said. "Foreign businesses are welcome to come to China to set up businesses according to the law."

In January, Mountain View, California-based Google Inc. said it may close its Chinese Web site because of alleged cyber attacks and China's ongoing online censorship.