China in no mood to be whipping boy at G20

By Alan Wheatley and Aileen Wang - Analysis

BEIJING (Reuters) - With its external surplus melting like a snowman in the sun, China is likely to give short shrift to any attempts to blame it for the woes of the world economy when finance ministers meet in Scotland at the end of the week.

Beijing feels aggrieved that critics are dwelling on its rigid exchange rate, saying it steals jobs from others, and are not giving enough credit for its aggressive monetary and fiscal stimulus, which is sucking in imports from around the globe.

"I think China has done a lot of work and made a great contribution to helping the world economy weather the financial crisis. Keeping the yuan stable is part of that," said Zhang Xiaoji, a researcher with the Development Research Center (DRC), a think-tank under the State Council, China's cabinet.

China let the yuan rise 21 percent against the dollar between July 2005 and July 2008 before effectively repegging the currency to help its exporters cope with a slump in global demand.

Because of the dollar's fall, the yuan's nominal effective exchange rate has depreciated 7.6 percent since its peak early this year, the World Bank said in a report issued on Wednesday.

Yet the bank forecast that China's current account surplus would fall to 5.8 percent of GDP this year, and then to 4.1 percent in 2010, from 9.8 percent last year and a peak of 11.0 percent in 2007.

Drooping demand in rich countries is, of course, part of the explanation. But China's reflation package has succeeded in generating domestic demand that has boosted imports from a wide range of trading partners, not just commodity exporters such as Australia. China's imports from Germany, for instance, are back to pre-crisis levels, according to Goldman Sachs.

As a result, net exports reduced Chinese GDP growth of 7.7 percent in the first three quarters of the year by a whopping 3.6 percentage points, according to government figures.

China, now the world's largest auto market, was contributing more to global demand than either the United States, the euro zone or Japan, said Vikram Nehru, the World Bank's regional chief economist.

"China's rapid growth is not only pulling the region along; it is also having an impact on the global economy," Nehru told reporters.

STRUCTURAL ISSUES

As such, China will feel it can marshall strong arguments at the Group of 20 meeting in St. Andrews that it is already pulling its weight and that currency adjustments are not the be all and end all.

Rather, they are just one component of a broad set of policies needed to put the global economy back on an even keel.

And even though China recognizes the need eventually to restore flexibility to the exchange rate, why, officials ask, take unnecessary risks now with the global economy still wobbly?

"The time is not ripe for China to resume yuan appreciation because the prospects for the world economy ares still not very clear," Zhang, the State Council researcher, said.