China’s ability to boost domestic demand rather than the value of the country’s currency is the key to ensuring more balanced global economic growth, said Sun Zhenyu, the Chinese ambassador to the World Trade Organization.
“The exchange rate itself is not a decisive factor in the whole balance of world trade or world economic development,” he said in a July 1 interview in Brussels. “The real issue here is about China’s consumption, whether China has consumed enough or spent enough, also whether the U.S. has saved enough.”
China, the world’s fastest-growing major economy, is pressing companies to become more competitive and encouraging greater domestic consumption to reduce its reliance on investment and exports. It last month signaled an end to the yuan’s peg to the dollar, adopted during the global crisis to shield exporters. While retail spending is expanding, tens of millions of jobs still depend on export industries such as textiles, electronics and machinery.
The yuan’s two-year peg to the dollar ended on June 19 when China said it would allow greater flexibility in the currency to curb inflation and rebalance the economy away from exports. The peg, at about 6.83 per dollar, had blunted the competitiveness of Asia’s export-dependent nations.
The People’s Bank of China has allowed the yuan to gain 0.8 percent since then, and the currency is now allowed to trade by up to 0.5 percent against the dollar either side of the so- called central parity rate.
Profit Margin
The currency-policy change will hurt many small Chinese exporters who already struggle to make ends meet, Sun said.
“For most of China’s exporters, particularly the smaller private enterprises, their export profit margin is very low,” he said. “Some of them have a profit margin of only 3 to 5 percent. This change of the exchange rate can affect them negatively.”
China wants smaller exporters, particularly those in the processing industry, to help offset the impact by becoming more competitive and innovative, Sun said.
“We encourage our enterprises to really try to climb the ladder, from the lower end to higher-grade products, to have more contents in value-added and in technology and innovation and also to improve the content of the processing industry,” he said. “Many of the processing industries are at the lower end and processing fees are very low and they aren’t really making any profit.”
Trade Surplus
Chinese shipments abroad climbed 48.5 percent in May from a year earlier and the trade surplus widened to the biggest in seven months. The U.S. trade deficit with China reached $71 billion in the first four months of the year, up 5.7 percent from the same period in 2009, U.S. government data show.
China’s trade surplus, which dropped $100 billion in both 2008 and 2009, “will continue to improve,” Sun said. “The surplus is expected to drop by another $50 billion to $100 billion this year,” he said.
Sun said China’s decision to allow greater yuan flexibility will help strengthen ties with governments including the U.S., where lawmakers such as Senator Charles Schumer have said the pledge is just a “baby step” and that the U.S. stance against China isn’t tough enough.
“Even if this is a small step, people should give recognition to the efforts China is making,” Sun said. It’s a country like a Cape-size oil tanker with 1.3 billion people and a great number of poor people. It can’t move as fast or as flexibly as a torpedo boat.”
