China accused of manipulating yuan and adding to economic woes
Updated
The White House is being urged to act as Chinese Premier Wen Jiabao refuses to revalue China's currency, the yuan. A bipartisan bill introduced in the U.S Senate is threatening Beijing with duties on some of its exports, if it fails to revalue its currency. It's pressing China to change policies that critics say keep its yuan currency cheap and effectively subsidise Chinese exports and tax competing imports. Now Nobel prize winning economist Dr Paul Krugman is certain to fuel the debate between the US and China over the exchange rate of the yuan. He advocates playing policy hardball with the Chinese, whom he accuses of adding to the world's economic problems.
Presenter: Scott Alle
Speakers: Ben Simpfendorfer, chief China economist, Royal Bank of Scotland
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ALLE: It's the latest in a long list of complaints about Beijing manipulating its currency the yuan.
In his NY times newspaper column highly respected US economist Paul Krugman attacked the policy, saying it was a significant drag on global growth and something has to be done.
But just how seriously should we really take the US protests of an artificially low Chinese currency.
Ben Simpfendorfer is chief China economist at the Royal Bank of Scotland in Hong Kong.
SIMPFENDORFER: It is a serious issue. If China was to appreciate its currency it's not obvious manufacturing would go back to the United States. It's more likely it would go to other countries such as India and Vietnam.
ALLE: The argument put by Mr Krugman and others is that China's actions by keeping the yuan pegged to around 6.83 to the dollar since October 2008 helps Chinese exports cheap, effectively giving them a subsidy and an advantage over foreign competitors.
Critics claim Bejing has also sold the currency and bought foreign currencies to keep the yuan weak, in the process accumulating 2.4 trillion US dollars in foreign reserves. Analysts think US dollars account for about two-thirds of that amount.
But Ben Simpfendorfer says Chinese policymakers don't have many other options than to accumulate greenbacks.
SIMPFENDORFER: It's very difficult to diversify such a large amount away into other assets. particularly the European debt given the concerns over Greece and at the same time emerging market government debt given those markets are so small and so liquid whether through design or not the Chinese end back in the US
ALLE: To stop what China critic Paul Krugman calls an exchange rate distortion, the Princeton Economics professor wants the conservative US Treasury Department to declare Beijing a currency manipulator, something it's refused to do in the past.
The opportunity will come in a report due next month, but even if the label is applied its unlikely to really mean much.
Ben Simpfendorfer from RBS.
SIMPFENDORFER: It doesn't officially result in any kind of punitive action at all, but what it does mean is that the US congress will find it easier to impose some higher trade tariffs on Chinese imports and it would result naturally in an increase in trade protectionist measures.
ALLE: Many analysts think Beijing will let the yuan appreciate anyway, mainly as a buffer against rising inflation.
A three to five per cent appreciation is forecast by the end of this year, but Ben Simpfendorfer says increases in production costs such as energy charges and wages need to occur as well.
SIMPFENDORFER: The faster you appreciate the currency the more difficult it is to raise the other production costs so I would argue against a sudden or significant appreciation of the yuan. I would prefer to see those production costs hiked because that would ultimately be a better outcome for China and the United States.
ALLE: Just a few days ago Premier Wen Jiabao dismissed US claims about the yuan being undervalued and said China would resist any foreign pressure for a stronger currency.
It seems any yuan movement is on hold until China decides it is necessary.
