SAFE pushes back in currency spat

Updated: 2013-03-07 11:32

By Joseph Boris in Washington (China Daily)

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The world's major economies should observe a consensus reached at the G20 summit in Moscow last month to refrain from engaging in competitive currency devaluation, said a top Chinese foreign exchange regulator on the sidelines of the annual session of the National People's Congress in Beijing on Wednesday.

"There is no winner in a currency war," said Yi Gang, head of the State Administration of Foreign Exchange. "In terms of both monetary policies and other mechanism arrangements, China will take the quantitative easing policies implemented by the central banks of foreign countries into full account."

G20 members promised at the meeting that they would not wage a currency war and agreed that monetary policies should primarily serve as a tool for domestic economies.

Yi said the yuan's value has come close to a balanced level and it will become more balanced, more flexible and remain basically stable this year. His comments came after a senior United States official urged China on Tuesday to "reinvigorate" efforts to let the yuan float freely based on market forces while making more progress on reforms toward a more consumption-driven economy.

Lael Brainard, Treasury Department undersecretary for international affairs, also called on the world's major economies to pursue "mutually compatible" growth strategies including recent pledges not to use their currencies to gain advantages in trade.

"We're going to continue to push very hard on fulfillment of those G20 commitments not to target exchange rates for competitive purposes and to move more rapidly to market-determined exchange rates. It's a very high priority for us," Brainard said to a conference of the National Association for Business Economics in Washington.

Brainard acknowledged China's moves to liberalize its yuan and strengthen it against the dollar.

"But more progress is needed," she said. "We will continue to push very hard on those commitments."

Yi, however, maintained that the "supply and demand for the yuan is by and large balanced and monetary authorities will not have to intervene too much".

China is fully prepared for a currency war should other countries initiate it first, said the deputy governor of the People's Bank of China last week.

Currently, the PBOC, China's central bank, allows the yuan to trade within a band of 1 percent above and below the dollar's value on a given day. The yuan gained 52 basis points to 6.27 in its central parity against the US dollar on Wednesday.

The yuan has appreciated by 30 percent since 2005. It is expected to appreciate by 2 percent to 3 percent against the dollar this year, global banking agency Deutsche Bank forecast in a recent report.

"China will need to do more than continue meeting rising expectations inside China, and at the same time bring China's conduct in the global trade and financial system more into alignment with international expectations," Brainard said. "More progress is needed on structural reform. To achieve a durable shift to sustainable consumption-led growth, it will be important that China reinvigorate the move to market determination of the exchange rate and interest rates."

Although her remarks about China were mostly a reiteration of long-held US government views, they came at a sensitive time. Last month's G20 meeting was largely aimed at addressing volatility in exchange rates and the prospect of reciprocal currency devaluations.

Fears of devaluation - a move that boosts manufacturing in a country because its exports are cheaper - have focused on monetary-easing policies by the central banks of the US and Japan. Brainard defended US government purchases of Treasury bonds and other domestic assets to target needs at home, citing a recent statement from the Group of Seven nations to allow such policies as long as they don't involve exchange-rate manipulation.

Such fears may be overblown since competition to lower currency values would hurt the countries involved, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

"I tend to think 'currency war' is not apropos of what's going on now," Chandler said. "China was not cited once as a currency manipulator (during the two terms of US President George W Bush or so far under Barack Obama). The idea that a currency war leads to a trade war leads to a shooting war - I don't think that's very helpful."

(China Daily 03/07/2013 page1)