Make way, not war
Senior Chinese central bank official warns against tit-for-tat currency devaluations, calling on G20 nations to work together on the issue
China's foreign-exchange regulator urged Group of 20 nations to improve collaboration to avoid any so-called currency wars while signalling he is comfortable with the value of the yuan.
On a global level, there needs to be "better communication and co-ordination" on foreign exchange among the G20, Yi Gang, who is also a deputy governor of China's central bank, said at the World Economic Forum's annual meeting in Davos, Switzerland on the weekend.
"Right now, it is pretty much close to the equilibrium level," he said, referring to the Chinese currency's exchange rate.
Japanese Economy Minister Akira Amari said his nation aimed to defeat deflation rather than weaken the yen, after Prime Minister Shinzo Abe's push for laxer monetary policy sparked a slide in the currency. His comments on Saturday followed a week in which German and Canadian policymakers joined a worldwide chorus highlighting a recent plunge in the yen as a worry.
"A currency war, a series of tit-for-tat competitive devaluations, would trigger trade protection measures that would damage global trade and therefore growth globally," said Louis Kuijs, the chief China economist at Royal Bank of Scotland in Hong Kong who previously worked for the World Bank. "That would not be good for any country with a stake in the global economy."
The yuan was still "somewhat below 'fair value'", Kuijs wrote in a note on Friday. He estimated that its nominal effective exchange rate, the relative value of the yuan compared with other major currencies, appreciated 2.5 per cent between the end of September and January 23.
Criticism over China's exchange-rate system has abated in recent months. Lawrence Summers, the former top economic adviser to US President Barack Obama, said earlier this month that the yuan was no longer as undervalued as it was five years ago. The currency, which has strengthened about 17 per cent against the dollar since the end of 2007, rose 1 per cent last year, the least in three years.
The People's Bank of China on Friday set the daily yuan fixing at the lowest level to the dollar since January 9, spurring speculation the central bank is seeking to cap gains as a slide in the yen makes Japanese exports more competitive. China's new leadership, headed by Xi Jinping, is seeking to support a recovery in the world's second-biggest economy without triggering inflation and a surge in banks' bad debts. Gross domestic product increased 7.9 per cent in the fourth quarter from a year earlier, the first acceleration in two years.
Industrial companies' profits rose in December for a fourth month, a statistics bureau report showed, adding to signs the country's rebound is gaining momentum. Net income increased 17.3 per cent from a year earlier to 895 billion yuan (HK$1.1 trillion) after a 22.8 per cent jump in November. Earnings for the full year gained 5.3 per cent, down from a 25.4 per cent pace in 2011.
Yi, who heads the State Administration of Foreign Exchange (Safe), said he was concerned about the potential fallout from expanded asset-purchases programmes and near-zero interest rates in the world's advanced economies.
"Quantitative easing for developed economies is generating some uncertainties in financial markets in terms of capital flows," said Yi, who is also head of China's foreign-exchange regulator. "Competitive devaluation is one aspect of it. If everyone is doing super QE, which currency will depreciate?" Safe warned last week that China would see fresh speculative inflows of money after the US and Japanese central banks said they would pump more funds into their financial systems.
"The policies in major economies of monetary easing and low interest rates will boost global liquidity, increase risk preferences in the market and drive speculative funds into China," the regulator said.
China's economy expanded 7.8 per cent last year, the least since 1999, and that compared with an average annual increase of more than 10 per cent over the past two decades. Policymakers have signalled a tolerance for slower growth as they seek to shift to a consumer-driven economy and away from a reliance on exports and investment that's led to environmental degradation, industrial overcapacity and social unrest.
Yi said at Davos that "for the foreseeable future probably we still have the potential of 7 to 8 per cent growth" that would be mainly be led by domestic demand "as people's income continues to increase".