Commentary: Waiting, and waiting, for a rise in the yuan
By William Pesek Jr. Bloomberg News
THURSDAY, MAY 12, 2005
Watch what they do, not what they say. It's the first commandment when observing economic policy makers. Yet China, which has a knack for testing the rules of economics, is breaking this one, too. There, it's equally important to follow what's said as well as what's done.
Here is what Li Yong, China's deputy finance minister, had to say last week to currency traders pressuring China to let the yuan rise: "I urge them not to do such speculation - they need patience."
Anyone seeking confirmation that China won't alter the yuan's peg to the dollar might find it in that comment, which Li made in Istanbul.
Currency markets are a world of winks, nods and secret handshakes. Key policy makers rarely, if ever, say exactly what's on their mind. Yet Li's comments are a reminder that any chance China might re-peg the yuan at a higher level is being dashed by the very people pushing for it: traders and leaders of governments in the United States, Japan and Europe.
The more foreigners try to bully China, the more investment banks churn out reports predicting a yuan shift and the more speculators react to them, the longer the process may play out. All this could leave investors with the equivalent of Samuel Beckett's "Waiting for Godot."
In that play, "nothing happens, twice" as the characters Vladimir and Estragon stand around, waiting. It's an existentialist story about hope, or waiting for hope to arrive. A situation that calls to mind the currency traders and governments waiting for China to loosen the yuan.
Here are five reasons to think that nothing will happen in the near term.
First, China is far less moved by outside pressure than many seem to appreciate. It may move only when there's a pressing domestic need to do so. China's largest state-run banks are shackled with hundreds of billions of dollars of bad loans and the economy doesn't have much of a bond market to speak of.
"China has made it very clear that it sees no reason to change the value of its currency," says Carl Weinberg, chief global economist at High Frequency Economics in Valhalla, New York.
Second, it's important that China gets it right. While China should reduce its currency advantage to restore a bit of equilibrium in global trade trends - and placate the United States, Japan and Europe - it would be in no one's interest to see China act haphazardly, threatening global stability. The last thing China wants is currency instability.
Third, there's the matter of saving face. For China to be seen as bowing to the demands of the United States or Japan would not play well with Chinese citizens.
Fourth, China may actually benefit from expectations of a shift more than from the reality of one. A significant currency appreciation at a time when China is rolling out initial public offerings of major banks could complicate efforts to reduce bad loans and make bank shares less attractive to overseas investors, says Andy Xie, Hong Kong-based chief Asia economist at Morgan Stanley.
And revaluation expectations may actually help China cool inflation and asset imbalances. Many analysts argue that China's property market has risen to bubble proportions. That it has experienced some "turbulence" of late, Xie says, isn't such a bad thing.
"The revaluation expectation is keeping many speculators from selling," Xie says. "When the prices are down, these people will be stuck, which should help China achieve a soft landing in this important sector."
Fifth, China might set a precedent for speculators. If China does give into pressure and raises the yuan 3 percent or 5 percent, markets would immediately start pushing for more. So would lawmakers in the United States who have been threatening trade sanctions. Having set a precedent, Chinese officials would be distracted from vital economic reforms.
Which brings us back to "Waiting for Godot." Beckett wrote it in part to challenge audiences expecting a conventional story with a beginning and climax that unfold in a logical manner. China's transition from a fixed currency regime could pose a similar conundrum.
As the Columbia University professor Jeffrey Sachs often says, China faces the greatest development challenge in history. Yes, its economy is growing at a 9 percent pace, yet restructuring efforts mean that the government has to create hundreds of millions of jobs to maintain social stability. It is a big enough feat without having to worry about currency traders attacking you.
Revaluing the yuan also could hurt foreign retailers like Wal-Mart Stores in adding jobs to the world's most dynamic economy, at least in the short run. It's not about Wal-Mart; it's about employing more Chinese.
The dollar peg is the second Great Wall. The first one was built in the third century B.C. to keep out invading tribes. The second one, the currency regime, was put up a decade ago to keep out speculators and protect the economy. Moving it will be a major undertaking that is as much about politics as economics.
As a result, China may very well keep those betting on a currency move waiting. And waiting.
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