By Judy Chen
Nov. 6 (Bloomberg) -- Barack Obama's calls for changes in China's yuan policy may put the president-elect on a collision course with the U.S.'s second-largest trade partner, which is holding the currency stable to support its export-led economy.
Obama said China must stop manipulating the currency in a letter to the National Council of Textile Organizations released on Oct. 24. The People's Bank of China has kept the yuan almost unchanged against the dollar since mid-July as it shifts focus from countering inflation to sustaining growth amid a global credit crisis. The Foreign Ministry said last week the U.S. shouldn't blame its trade deficit on exchange rates.
``Obama may exert more pressure on China's foreign-exchange policy to boost U.S. exports and curb unemployment, but China will first consider its own economic fundamentals,'' said Ha Jiming, Hong Kong-based chief economist at China International Capital Corp., the nation's first Sino-foreign investment bank. He predicts the yuan will weaken as much as 3 percent against the dollar in 2009.
Half of China's toy exporters went out of business in the first seven months of the year because of rising production costs and rapid gains in the yuan, a customs bureau report showed last month. China raised export rebates this month after government data showed the economy expanded 9 percent in the third quarter, the slowest pace in five years.
`Facing Slowdown'
``China is facing a significant slowdown of its own,'' said Donald Straszheim, Los Angeles-based vice chairman of Roth Capital, a U.S. investment bank specializing in emerging markets. ``Beijing will stop currency appreciation for several more months, and Washington won't like it.''
The U.S.-China Strategic Economic Dialogue, a semi-annual meeting started by Treasury Secretary Henry Paulson in 2006 will be held next in December, before Obama takes office on Jan. 20. Paulson has refrained from accusing China of manipulating its currency to make exports more competitive, while lawmakers, including Senator Charles Schumer, a New York Democrat, proposed sanctions unless yuan controls are loosened.
``Currency manipulation has been a quite specific implication in law, and no other president has ever used that term,'' said Straszheim. If Obama doesn't take actions following the charge that China is manipulating the yuan, ``he will be regarded as another old type politician who promises one thing during the campaign and does another in office,'' he added.
Policy of Stability
The yuan traded at 6.8266 per dollar as of 12:42 p.m. in Shanghai, climbing 7 percent this year and exceeding the 6.9 percent advance in 2007. It has risen 0.3 percent since the end of September as Indonesia's rupiah slid 12 percent and South Korea's won weakened 9 percent.
Non-deliverable forwards contracts indicate the yuan will fall 1.3 percent to 6.9149 in the next year. Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date.
People's Bank of China Governor Zhou Xiaochuan told the nation's lawmakers on Oct. 26 that the central bank will maintain the yuan's stability and a global slowdown will ``unavoidably'' hurt China's economy.
``China has contributed to the recovery of the global financial system by keeping its currency stable in this turmoil, as it did in the 1997 Asian crisis,'' said Zhang Xiaojing, director of the department of macroeconomics at the state-run Chinese Academy of Social Sciences. ``Foreign countries should not criticize more on the yuan policy.''
Engine of Growth
Paulson said on Oct. 21 that he is ``pleased'' that China's currency has appreciated more than 20 percent since a peg against the dollar was abandoned in July 2005. He also praised China as an ``important engine'' of growth.
China's exports rose 21.5 percent from a year earlier in September, after gaining 21.1 percent in August, according to government data. The trade surplus climbed to a record $29.4 billion, from $28.8 billion in the previous month.
It will be ``politically difficult'' for China to devalue the yuan because of its huge trade surplus and rising protectionism, Frank Gong, JPMorgan Chase & Co.'s Hong Kong- based chief China economist, wrote in a report yesterday.
JPMorgan forecast the yuan will appreciate 4.2 percent to 6.55 by the end of 2009, stronger than the median estimate of 6.6 in a Bloomberg survey of 21 analysts.
``It will be emphasized in the next Strategic Economic Dialogue that it is more important than ever that China should rely more on domestic demand rather than its trade surplus to sustain economic growth,'' said Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington.
To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net
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