Decoding China's Yuan Messages
The talk at Davos by the country's delegates -- official and otherwise -- reveal a wide range of possible currency policies
Parsing Chinese statesments was a widely played game at the World Economic Forum this year. With a G-7 meeting just one week away, everyone was asking about the yuan: Will China revalue it? When? How much would the currency go up?
After a delay of several days, a large official delegation from Beijing finally descended on Davos, and for a time it seemed that Chinese were everywhere talking about the yuan. The entire conference was in a state of confusion because conflicting opinions were being offered. Few Davos participants could tell which Chinese officials actually knew the intentions of the real decisionmakers in Beijing. So, rumors rocked the conference halls for days.
The first tremor began on Wednesday, when Fan Gang, director of the nonprofit and nongovernment National Economic Research Institute in Beijing, said in a public session on the Chinese economy that "the U.S. dollar is no longer -- in our opinion -- a stable currency and is devaluing all the time." He then said "the real issue is to change from dollar-pegging to a...more manageable regime," meaning a larger basket of currencies that included euros and yen.
HOW PLUGGED IN? If that were to occur, the yuan would almost certainly rise against the dollar -- perhaps significantly. The room stirred, and all the wire-service reporters and bloggers rushed out to report a major change in Chinese policy.
Then people began to wonder just who was Fan Gang really representing when he said "in our opinion." Gang is a Davos regular. He's an academic with a PhD in economics from the prestigious Chinese Academy of Social Sciences. And he's known to be plugged in. But he doesn't sit on any of the important committees or groups that make official policy for foreign exchange. So sentiment began to drift away from the idea that China was losing faith in the dollar.
But the next day, at another session on the Chinese economy, Yu Yongding, director of the Institute of World Economics & Politics, told another audience that China was shifting from export-led to consumption-led growth, from an externally driven economy to a domestically oriented one. As a consequence inflation, not deflation, is the most important problem facing China, Yu said. Again, the clear implication was a move to either a basket of currencies or at a minimum, a wider trading band around the dollar, with the yuan rising in each case.
GRADUAL MOVE. Yu is also an academic, with an masters in economics from the same university Fan Gang attended. But he's an academic member of the People's Bank of China's Monetary Policy Committee, a key advisory committee. After reporters put Yu's comments out, sentiment moved again, back to the idea that China might revalue soon.
On Saturday morning, Huang Ju -- Vice-Premier of China and a really big political gun -- gave a speech in Chinese. Klaus Schwab, who founded and runs the WEF, asked Huang "what can we expect of the renminbi in 2005 and 2006?" Huang replied that China was "going to maintain a stable level for the renminbi" with the dollar. That was pretty clear to the audience. No revalution for the near future.
But Huang also went out of his way to say China had already decided to move to a more flexible exchange rate. However, he was unclear about when that might happen: "We will gradually press ahead with this."
"DON'T TELL US." And Li Ruogu, deputy governor of the Bank of China, repeated the message from the far more important Huang after lunch at another session. He said in English: "We will keep the renminbi rate at a stable level," and "we have already decided to move to more flexible exchange rates, but there is no timetable."
Li also stated that China is going to move slowly to a flexible exchange rate. And he warned that "foreign pressure would not force China to change its policy." Actually, Li got pretty steamed up about rhetoric from the U.S. "Leave this to China. We will figure it out," he said. "The majority of advice given to China is wrong. Don't tell us what is correct. We are happy and willing to listen, but we will have to figure it out. While we are waiting, we are not idle. We are creating all the conditions for taking all the steps [toward flexibility]."
He added that a big division existed within China over the renminbi. "There are different views among our economists. Some people say the renminbi should be appreciated. Some say it should be further depreciated." Given the way decision-making tends toward consensus in China, such wide division will act to slow any change in foreign-exchange policy.
IMPORTING INFLATION. So, putting together all these comments by all these Chinese officials, it doesn't sound as if Beijing intends to depeg the yuan from the dollar, go to a basket, or revalue in 2005. But then again, there's no getting around certain facts: Nearly $100 billion surged into China in the fourth quarter of 2004 alone, a record amount. Much of that is going into property speculation in Shanghai and other cities. China can't stop it.
As the dollar falls, it pushes up the dollar-price of oil and most other commodities that China imports. This forces the country to import more inflation. Worse, Taiwan, Korea, and Japan have decided to delink their currencies from the dollar (and the yuan) because they don't want to import this kind of commodity inflation. The Taiwan dollar, won, and yen all trade at 10% to 15% above the dollar and yuan, vs. a year ago.
Unfortunately for China, which imports tens of billions of dollars of parts and semifinished products from these North Asian countries, prices are rising by a like amount. Thus, China is importing inflation not just from the U.S. but from parts of Asia as well.
LIKE JAPAN? At a session on economic growth, Larry Summers, former U.S. Treasury Secretary and now Harvard president, pointed to parallels between Japan in the '80s and China today. Summers said that Japan had "speculative bubbles, and so does China." One of the most important is the land speculation under way in China. Japan didn't use the right policy to deal with it. Is China following the same road?
I'll wager that China's foreign-exchange position changes sooner than its policymakers now anticipate or indicate. Markets have a way of overwhelming intentions, even good ones.
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