Opinion

James Saft

A farewell to yuan whines

February 28, 2012

By James Saft

(Reuters) – Nobody seems to like picking on China any more.

Not only did the official communique issued by G20 central bankers and finance ministers assembled in Mexico City not mention the yuan, China was actually praised by U.S. Treasury Secretary Tim Geithner.

What a change it makes from summits past, when complaining about the undervaluation of the yuan was a seemingly fixed item on the agenda.

“China has played I think a really responsible, stabilizing role, despite its relative newcomer status,” Geithner said in Mexico City. “There’s been a dramatic change in the organization and structure of the economy towards domestic demand.”

Geithner also encouraged further appreciation of the yuan, saying it was in China’s best interest, but the overall tone was markedly different from one or two years ago.

The world has decidedly bigger problems these days than China artificially diverting demand towards its own exports, though it assuredly still is. An unfolding debacle in the euro zone is the rightful main focus, as it has the potential to greatly reduce demand rather than the lesser sin of simply redistributing it.

Of course the conciliatory treatment of China is also because it has what an ailing euro zone needs; cash that can be put to use in a rescue effort. Even better, China arguably has far more latitude in how it uses its massive firepower. China fell in line with its G20 partners over the weekend, as the G20 maintained that Europe needs to strengthen its own financial firewall before multilateral aid via the IMF can be considered.

It is probably true, if not fair, that the world has more to gain by keeping China onside in potential global rescue efforts than in divisively wringing out a few extra percent appreciation of the yuan. Not that I would bet on China to back euro zone rescue efforts in huge size, but that possibility is alive in a way that hopes of yuan appreciation simply aren’t.

Almost regardless of what the U.S. or anyone else says, strong gains in the yuan are not coming soon. China’s trade surplus is still huge, at $147 billion in 2011, but falling in size. Chinese exports actually fell 15 percent in January from a year before, and reserve accumulation was limited in the second half of last year.

All of that makes outrage over the yuan harder to muster, and less likely to make any difference. That’s not to say the currency isn’t still undervalued against its main trading partners. It is, and if productivity in China continues to grow at a faster pace than most of the rest of the world that gap will only increase.

FRAGILE MARKETS, SCRAP METAL

It is not for nothing that China’s exports and imports are both falling, and a real slowdown, if it comes, would have serious repercussions globally. That risk means yuan appreciation will be slight, and if things break badly it would not be a total surprise to see it reverse. China has a rapidly cooling property market tied in closely to a somewhat shaky banking system. Containing those issues may arguably prove more beneficial to growth in Rome or Detroit than moving the needle on the yuan.

People’s Bank of China advisor Li Daokui said over the weekend that there would be a two-way market in the yuan, something that contrasts with its slow and steady rise in recent years.

“The yuan exchange rate will undergo gradual adjustment for one year to a year and a half before it can stabilize. In other words, the yuan may be able to fluctuate in both directions until then,” he told China Securities Journal.

The yuan has risen more than 30 percent against the dollar since June 2005, and is up about 8 percent since June 2010 when China pledged to allow it to fluctuate more freely.

None of this is to say the yuan is where it would be in a true market, but the strong consensus now seems to be that this is not the fight to pick in 2012.

Looking at the number one U.S. export to China in 2011 by dollar value – waste and scrap – it is hard to argue that another 10 percent climb in the yuan will make that much difference. Making waste copper wiring from un-needed Florida real estate that much more competitive internationally is not going to revive the fortunes of the U.S.

That’s going to be a long, hard process and has a better chance of happening, as what was left unsaid in Mexico City demonstrates, in a world with global cooperation than one with a fairly valued yuan.

(Editing by James Dalgleish)

(At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on)

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