Chinese language - Wu: Large yuan appreciation would hurt China

BIZCHINA / Center

Wu: Large yuan appreciation would hurt China

(Bloomberg)
Updated: 2007-05-25 10:38

A "large" appreciation of the yuan would hurt China's economy, Vice
Premier Wu Yi said, signaling the nation won't cave in to U.S. demands
for faster gains to ease the U.S. trade deficit.

The yuan's value isn't the cause of the deficit, Wu said today at a
dinner in Washington attended by U.S. Treasury Secretary Henry Paulson
and Federal Reserve Chairman Ben S. Bernanke. About 85 percent of China's
surplus with the U.S. is from foreign companies exporting products no
longer made in the U.S., such as shoes, she added.

Vice Premier Wu concluded two days of talks with Paulson yesterday aimed
at easing U.S.-China trade tensions. U.S. legislators have pledged to
proceed with sanctions on Chinese imports unless the yuan climbs faster
than its 8 percent gain against the dollar since July 2005.

"China will definitely not drop its policy of letting the yuan rise
gradually," said Xiao Minjie, a senior economist at Daiwa Institute of
Research in Shanghai. "A big yuan appreciation would affect China's
exports," Xiao said, citing the textile industry.

China's reluctance to let the yuan rise faster is because stronger
currency would hurt company profits and jobs. The textile industry, which
accounted for 72 percent of China's trade surplus last year, loses 8.2
billion yuan of profits for every percentage point of currency
appreciation, the China National Textile and Apparel Council estimates.

The yuan was little changed at 7.6527 against the dollar as of 9:46 a.m.
in Shanghai, compared with 7.6519 late yesterday.

40 Percent Undervalued

Democratic Representative Sander Levin of Michigan, who chairs the trade
panel of the House Ways and Means Committee, said yesterday the yuan is
undervalued by as much as 40 percent.

"Large scale yuan appreciation will have a negative impact on China's
economy," Wu said, adding that trade protection would hurt relations
between the U.S. and China.

China last week increased the amount its currency can appreciate by
widening the bands within which it can fluctuate against the dollar to
0.5 percent from 0.3 percent.

"China will continue to reform its exchange rate on its own initiative,
gradually," Wu said.

The trading band will continue to widen and China will increase the
yuan's flexibility, Wu said. Still, China needs to guard against currency
risks, she said.

Yuan Flexibility

People's Bank of China Governor Zhou Xiaochuan also said this week that
China plans to further increase flexibility in the yuan's exchange rate.

Wu met with U.S. President George W. Bush earlier today. Bush later told
reporters the U.S.-China relationship was "complex" and that two nations
must work together to ease economic tensions. The U.S. posted a record
trade deficit of $232.5 billion with China last year.

The U.S. is "watching very carefully" China's steps on its currency, Bush
said, and is prodding China's government to open its capital markets to
international financial institutions.

China is taking steps to encourage consumers to spend and will become the
world's second-largest domestic market after the U.S. by 2010, Wu said.

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