BEIJING (Reuters) - The yuan has been locked in place against the dollar for nearly two years as Beijing has effectively re-pegged its exchange rate to buffer China’s economy against the ravages of the global financial crisis.
While the European Union, Canada and a handful of developing countries have all criticized this policy, it is the United States that has taken the lead in threatening to punish China if it does not revalue the yuan.
China defiantly restated its commitment to a stable yuan after the U.S. Senate this week introduced legislation that could lead to duties on Chinese products. Yet there are signs that Beijing may be looking at how and when to resume appreciation.
A range of officials have spoken about the controversial currency policy over the past few weeks. Management of the yuan is shrouded in secrecy, but the comments have exposed the outlines of different schools of thought in the government.
Here is a run-down of the three main camps and what the market makes of their divergence:
Commerce Minister Chen Deming has been consistent since the yuan was fixed at about 6.83 to the dollar in mid-2008, insisting stability has been good for both China and the world.
The commerce ministry is focused on supporting exporters. Foreign critics say that an artificially undervalued exchange rate is a major subsidy for made-in-China products.
Chen used the government’s annual session of parliament this month to press the case for keeping the yuan stable for a while longer and, tellingly, said that it might take another two to three years for exports to recover to pre-crisis levels.
“The direction of yuan reform will be gradual and controlled,” he told Reuters.
A government source this week said that the commerce ministry had conducted “stress tests”, to examine whether coastal exporting hubs can withstand appreciation. The conclusion was that a stronger yuan would squeeze already-thin margins, but that it could also prod firms to move up the value chain.
Central bank Governor Zhou Xiaochuan set the cat among the pigeons when he said two weeks ago that “sooner or later” China would have to end its “special yuan policy”.
Tasked with maintaining price stability, the central bank is naturally more hawkish about inflation than other government bodies. Signs of increasing price pressures may be why Zhou seems to be flagging yuan appreciation as a policy option.
In 2007, when prices were surging and the economy overheating, the central bank sped up the pace of appreciation.
But the central bank is also charged with supporting “quite fast” growth, and the fragile state of the global economy means it is wary of pushing too aggressively for a yuan rise.
“We must be extremely prudent about our choice of timing,” Zhou said.
In the official list of China’s 28 top ministries, the central bank is ranked 27th, just after the National Population and Family Planning Commission and ahead only of the National Audit Office.
The State Council, or cabinet, is seen by many as the final authority in charting China’s yuan policy, though any decision to de-peg may be a matter for the Politburo Standing Committee, the nine member-body at the pinnacle of the Communist Party.
Premier Wen Jiabao, who heads the State Council and has a seat on the Standing Committee, used China’s most important news conference of the year on Sunday to say that countries pushing for yuan appreciation were, in fact, being protectionist.
He also maintained that the yuan was not undervalued — a claim which infuriated the U.S. senators who decided to proceed with legislation against China.
Yet Wen also dropped a few hints of greater flexibility. He said that China wanted to reform the yuan’s exchange rate mechanism, language rarely heard since Beijing repegged the yuan to the dollar in mid-2008.
China’s top leaders can shift gears quickly if prices soar. Social discontent over rampant inflation was a factor behind the Communists’ rise to power in the 1940s and also behind the Tiananmen pro-democracy protests in 1989.
To that end, it is also significant that China is targeting average inflation this year of 3 percent, a goal that some economists reckon will be challenging given a bubbly economic environment in which price pressures are mounting.
There is a broad expectation that China will let the yuan appreciate this year amid price pressures. Just how it will do that is a source of much guesswork. Insiders say even the central bank chief may not know what the State Council is planning to do.
Some analysts think Beijing will spring a one-off revaluation surprise on the market, pushing the currency up by 5-10 percent against the dollar. But most think it will allow only faint appreciation, incrementally and haltingly.
Investors have this week scaled back their bets on any imminent move, believing Beijing will find it politically unpalatable to appear to cave into U.S. pressure.
The market is pricing in a roughly 2.5 percent rise in the yuan against the dollar over the next 12 months, according to offshore forwards. (Reporting by Simon Rabinovitch; Editing by Kim Coghill)