A fine balancing act
The yuan's exchange rate may already be close to a balanced level, Premier Wen Jiabao said yesterday, hinting that the currency's appreciation may come to a halt - an eventuality which could fuel tensions with China's trade partners, particularly the United States.
Speaking at a televised news conference capping the 10-day annual parliamentary session yesterday, Wen said the yuan had gained 30 per cent in real terms since 2005 and has moved up and down since September in Hong Kong trading of non-deliverable forward contracts.
'That shows that the renminbi exchange rate may possibly have reached an equilibrium exchange rate,' he said. His government would push for 'relatively large-scale' two-way fluctuation for the yuan to make it more flexible.
The yuan reference rate has been set at about 6.32 per US dollar since Monday, down from Friday's 6.3073 and touching a one-month intraday low, triggering a new round of speculation about the yuan's depreciation relative to the greenback.
However, Lu Ting, chief China economist with Bank of America Merrill Lynch, said he didn't think Wen's remarks meant an end to the yuan's appreciation. Lu said that Beijing had simply used the trade deficit in February as a rare opportunity to increase the two-way volatility of the yuan-dollar exchange rate. On Saturday, the General Administration of Customs said the world's largest exporter posted a trade deficit of US$31.48 billion in February after a US$27.28 billion surplus in January. It was the largest deficit in a decade.
Wen said China had already achieved basic balance in international payments, as the current account surplus had fallen below 3 per cent of gross domestic product.
Beijing and Washington have long disputed their huge trade imbalances, with US politicians and manufacturers accusing Beijing of keeping the yuan's value artificially low to help Chinese exporters.
Wen appealed for closer co-operation with Washington to resolve 'difficulties and frictions', and called for collaboration on clean energy, environmental protection, aviation and other technological fields.
The premier also said China plans to invest in US infrastructure.
Turning to the domestic economy, Wen said China would be able to ride out the global economic downturn driven by the European debt crisis; 2012, he said, may be 'the most difficult, yet most promising, year'.
The government has also lowered its growth target this year to 7.5 per cent from the 8 per cent level in place since 2005. Wen said the lower growth rate would help improve the quality of growth and shouldn't be considered too low. Growth of the world's second-largest economy slowed to 8.9 per cent in the final quarter of 2011 after Beijing clamped down on credit and investment to steer expansion to a more sustainable level.
'We hope China's growth will no longer come at the cost of resource consumption and environmental pollution,' he said.
Wen pledged to make growth more resilient to external pressures, deflate domestic property and inflation risks, and deal with the 10.7 trillion yuan (HK$13.1 trillion) in debt racked up by local governments.
Wen said that local governments' debt was manageable, despite many analysts believing that about 20 to 30 per cent of it, mostly in the form of bank loans, may turn sour, crippling the banking system. 'The debt-to-GDP and budget deficit-to-GDP ratios for China are at fairly low levels. They are both lower than in many developed countries and emerging market economies,' he said.
Lu noted that some local government debt may have been reclassified as corporate debt last year, meaning the 10.7 trillion yuan figure may not be accurate.
800b yuan
Beijing's forecast fiscal deficit for this year, 100 billion yuan less than last year
