China in no mood to let G7 budge it on yuan

By Alan Wheatley, China Economics Editor - Analysis

BEIJING (Reuters) - Like a broken record, foreign finance ministers keep calling for the yuan to rise more quickly.

Like a broken record, economists keep arguing that without a stronger yuan, China's monetary policy will remain hamstrung.

And like a broken record, Chinese leaders keep promising they will indeed let the yuan, or renminbi, move more freely.

"We will improve the RMB exchange rate regime and gradually make the RMB convertible under capital accounts," President Hu Jintao intoned on Monday at the Communist Party Congress.

The problem for Group of Seven rich industrial nations, which are likely to take China to task once more when they meet in Washington on Friday, is that Beijing is being far too slow to match words with deeds.

The yuan CNY=CFXS has risen just 8 percent against the dollar since it was depegged from the U.S. currency in July 2005. It has fallen by about the same amount against the euro and has barely appreciated against a basket of currencies.

What might change the yuan's trajectory?

Not the G7 meeting, according to Mingchun Sun, an economist with Lehman Brothers in Hong Kong. "For China's leaders the Party Congress is much more important than the G7. They don't have time to spend on it," he said.

Making Sun's point, central bank governor Zhou Xiaochuan is staying at home and sending his deputy, Wu Xiaoling, to listen to the growing chorus of complaints about China's currency policy.

THE POLITICS STAY THE SAME

China has consistently stressed that greater yuan flexibility is just one element of its strategy for reducing the record trade surplus that is making its economy imbalanced and riling the G7.

Cutting tax rebates for exporters, imposing taxes to deter exports of low-end goods and raising artificially low production costs -- by liberalising resource prices and increasing the cost of treating pollution -- are also important pieces of the puzzle.

The emphasis that Hu put on balanced growth and "scientific development", particularly to reduce environmental degradation, suggests Beijing will persevere with this broad policy thrust.

"So unless they think they're not going to make sufficient progress in those other areas, I think they will still keep exchange rate appreciation at around 5-6 percent next year," Sun said.

Stephen Green and Gavin Redknap of Standard Chartered Bank, who also have low expectations of the G7 meeting, have pencilled in a 5.5 percent rise in the yuan next year from a target of 7.4 per dollar at the end of December.