Sound and fury

The almighty renminbi?

The focus of the Sino-US debate on the value of the renminbi seems to be one the move – from head-spinning statistics towards hand-wringing dramatics.

The rhetoric is definitely hardening. Zhong Shan, vice-minister of commerce, gave a speech last week declaring that American pressure for a stronger renminbi “is unacceptable to China” and the local headlines have been calling for no backing down in the currency battle. Meanwhile, in the US, Senator Sam Brownback has promised that if the Chinese government didn’t take corrective action soon, “we’re going to force them”.

The key date is April 15, when the US Treasury department will issue its next exchange rate report. Officials have been under growing political pressure to brand China a currency “manipulator”. If that was to happen, calls would soon grow for punitive tariffs on Chinese goods (see WiC50).

So last week, the Chinese side tried to get its retaliation in early. Premier Wen Jiabao announced – two weeks ahead of schedule – that for the first time in six years, the country might run a trade deficit for the month of March.

The official numbers for March will not be released until April 10, but it looks like Wen wanted to make the announcement sooner rather than later. At a meeting with foreign executives, he let it slip that the March deficit would be about $8 billion.

“To be honest with you, I am pretty happy about this development,” said Wen.

Why? Critics of China’s currency policy often cite persistently large trade surpluses as evidence that the renminbi is undervalued, and gives Chinese exporters an advantage.

But a trade deficit in March would lend weight to some of those arguing that exchange rates are not the leading issue, says the Wall Street Journal.

Still, economists say the March deficit is probably more of a blip than the start of a trend, and that China is still likely to post a large trade surplus for the year. The World Bank forecasts a Chinese current-account surplus, the broadest measure of its trade position, of $304 billion this year, after it dropped to $284.1 billion in 2009 from a record $426.1 billion in 2008.

Despite Beijing showing little outward sign of budging on the renminbi, opinion is not necessarily united at home. Some leading local economists at the Chinese Academy of Social Sciences have been pushing for a sizable appreciation of the currency in recent months. In an article published earlier this year, researcher Zhang Bin called for a 10% increase and greater flexibility in daily trading limits in order to give the authorities more control over monetary policy and inflation.

Then again, Commerce minister Chen Denming also moved quickly to counter comments from officials at the central bank that seemed to suggest an upward revaluation would be beneficial.

The divergence of opinion reflects different agendas across government. The Ministry of Commerce has a remit to support the country’s exporters. But the central bank probably sees a partial revaluation as a policy tool in the battle against inflation. Consumer prices rose 2.7% in February from a year earlier.

Some say if Washington is a bit quieter on the issue, there is a good chance that China will soon act to strengthen its currency.

Some Chinese CEOs seem to support a stronger currency too. Bloomberg reports that the head of Lenovo believes it would help to boost domestic consumption and the boss of Hunan Lengshuijiang Iron & Steel Group has said that it would help to cut raw material import costs.

Zhang Yanling, vice chairman of Beijing-based Bank of China, told Bloomberg: “We need to emphasize the benefits of yuan gains. We shouldn’t politicise it or become emotional.”

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