President Barack Obama trumpeted his message of change all the way to the White House, but when it comes to the U.S. tone on China and its yuan, economists say that message might not apply. U.S. manufacturers have long claimed that the Chinese currency is undervalued, giving its goods a competitive edge. A weaker currency helps exporters by making their goods more attractively priced in overseas markets, and boosting the value of their repatriated profits. While Bush administration officials sometimes called for greater yuan appreciation, their pressure was relatively light. “As Treasury Secretary, [Henry] Paulson has favored the buddy-vs.-bully approach to China. Although the Chinese yuan has appreciated 15% over the past two years, it is still considered undervalued,” said Kathy Lien, director of currency research at GFT in New York.
In the first half of 2008, the Chinese currency appreciated about 6% against the U.S. dollar, but it was largely flat in the second half. Some investors are fearful that the new administration will step up the pressure on China to allow its currency to strengthen further, and that this will lead to deteriorating trade relations between the two countries.
Whether the Obama administration will change the U.S. tone on China “is a matter of concern. I do believe that the new administration may take a more protectionist approach, which may include pushing for a more favorable currency position,” said Rob Lutts, the chief investment officer of Cabot Money Management, a Salem, Mass.-based independent wealth-management firm. “There is a real danger in this new administration that they may abandon the free-market approach that we have all become reliant on in our analysis. We may find an administration that becomes tough on trade and sets barriers to global trade,” he added.During the campaign, Obama focused his attention elsewhere. But his Democratic rival Hilary Rodham Clinton the incoming secretary of state sometimes took aim at China’s trade surplus and product-safety record. Some politicians have even warned that Obama could not only step up the rhetoric, but back up tougher words with action. “I don’t think just jawboning will be the approach of this administration,” Rep. Sander Levin, a Michigan Democrat who chairs a trade subcommittee in the House of Representatives, said Wednesday, according to media reports.
Domestic priorities
In fact, China itself has every reason to avoid both depreciation and appreciation of its currency. The latter could further weigh on already drooping exports, and the former could lead to capital outflows from the country, at a time it can least afford this. Chinese authorities, like their U.S. counterparts, are giving priority to domestic economic challenges, as their country’s economic growth slows. Gross domestic product eased to 9% on the year in the third quarter of 2008, after growing by 11.9% in 2007. Reflecting the weak global demand, China’s exports contracted in December at their fastest pace in almost a decade. Shipments fell 2.8% to $111.16 billion from a year earlier, their biggest contraction since April 1999. See full story on China’s export slowdown. But so far, China does not appear to be poised to export its way out of the global downturn. Instead, it is pinning its recovery hopes on stimulus and steps aimed at boosting domestic demand, which bodes well for those betting on stable foreign exchange.
China has committed $586 billion in stimulus spending during the next two years to offset the effects of the global slowdown, with the bulk of the outlays expected to go toward infrastructure projects.
The People’s Bank of China has cut interest rates five times and reduced banks’ reserve requirements three times, since it embarked on a monetary-easing cycle in September in response to the deepening global economic crisis.
“While pressure is rising from slowing exports and GDP growth, we believe China will opt for exchange-rate stability in the near term,” said Stephen Schwartz and Ting Lu, Hong Kong-based analysts at Merrill Lynch.
“The authorities’ response to slowing growth has been an aggressive easing of fiscal and monetary policies to stimulate domestic demand, consistent with their stated longer-term goal of rebalancing growth toward domestic consumption and away from external demand,” they wrote in a research note.
Manipulator, or not
Last month, the outgoing Bush administration passed up its last chance to label China as a currency manipulator.
In its biannual report to Congress on the foreign-exchange market, the Treasury said that no major trading partner, including China, met the standards to be labeled a manipulator. “There is some speculation that Obama will reverse this and cite China, which would open the door to possible retaliation” if subsequent negotiations were to fail, according to Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.. “But there is little basis to believe this talk has merit.”
He said that Obama’s picks for the Treasury Department are heavily weighted in the free-trade wing of the Democratic Party. Therefore, Chandler added, Obama’s team — as well as the media — should “focus on the broad relationship with China and not allow the bilateral nominal-currency relationship to dominate his message.”
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Posted on January 22, 2009
at 10:02 pm
Written / posted by: Piere
Filed under: Currency Trading, News, Sharp Observations, forex trading