WASHINGTON (Dow Jones)--Accelerating inflation will force China to continue to appreciate the yuan, and if Beijing continues at its current pace of currency rise against the dollar, the move will be "huge," U.S. Treasury Secretary said Thursday.
Taking into account the inflation rate in China and the U.S., the yuan is continuing to rise compared to the dollar more than the rate Beijing is allowing the yuan to appreciate nominally.
"The risk for them if they slow the pace of appreciation is that inflation will accelerate further," Geithner told the Senate Foreign Relations Committee. "That's why it's inevitable that they continue to move, and of course, we want that move as quickly as possible."
If they slow the pace of appreciation against the dollar, inflation is still running substantially above the U.S., by some measures three times the rate of growth in the U.S., the secretary said.
Including inflation, the yuan is appreciating against the dollar at an annual rate north of 10%, Geithner said. "If that were sustained, again, that's a huge shift over time," he said.
But the pace of the yuan's rise isn't moving at the same clip for many other countries, particularly emerging economies that are also experiencing surging inflation. That has spurred greater pressure internationally for Beijing to move faster.
It has particularly been a problem for those emerging markets whose economies are at risk of overheating as capital flows surge into their nations seeking higher yields than low-interest rate, advanced economies currently offer. As China holds down its currency and others allow theirs to appreciate, it puts a greater burden on those economies, Geithner said.
The secretary also said there's no threat to the dollar's position as a global reserve currency unless the U.S., over time, fails to curb spending and curtail debt.
"There is no risk to the dollar's role that we do not control," Geithner said.
Boom in Stocks
The ranks of wealthy in China are rising as the nation experiences the fastest expansion of any major economy, with gross domestic product increasing on average about 10 percent annually in the past two decades. The benchmark Shanghai Composite Index of stocks climbed 124 percent in local-currency terms in the five years through February, compared with a 3.6 percent advance for the U.S. Standard & Poor’s 500 Index.
Zong, 65, a Communist Party member whose wealth Hurun puts at $12 billion, told reporters in Beijing March 1 he believes higher taxes and extensive welfare-benefit programs, such as those in Europe, sap energy from entrepreneurs. Nations with those policies will “have problems when all their money is spent,” he said.
‘No Jobs’
“Rich people are investing their money, creating more jobs,” Zong said. “If rich people all get killed, nobody is going to invest or build factories, there will be no jobs.”
Wen, 68, said Feb. 27 that the government would push to narrow a growing wealth gap which Credit Suisse Group AG said in an August report was at levels not seen outside of Africa. Wen pledged to tackle surging property prices that have put home ownership out of the reach of many, control inflation and crack down on official corruption.
"We should not only make the cake of social wealth as big as possible, but also distribute the cake in a fair way and let everyone enjoy the fruits of reform and opening up,” Wen said Feb. 27, according to state-owned Xinhua News Agency. Wen’s opening address to the Congress tomorrow is set to detail the government’s latest Five Year Plan for China, focused on bolstering domestic demand and household spending.
China’s leaders have embraced higher wages as part of their campaign, with all 31 of China’s provinces and regions likely to increase their minimum wages in 2011 for the second consecutive year, according to Credit Suisse. Rural incomes rose 10.9 percent in 2010 to an average 5,919 yuan, government data show.
Inflation Hit
Even so, accelerating inflation and rising property prices have undermined households’ spending power. Consumer prices have exceeded the government’s 4 percent target for 2011 in each of the past four months. Slums have emerged in the suburbs of cities from Beijing to Guangzhou as migrant workers and cash- strapped urban youth seek an affordable place to live.
China’s Gini coefficient, an income-distribution gauge used by economists, has climbed to near 0.5 from less than 0.3 a quarter century ago, according to Li Shi, professor of economics, School of Economics and Business at Beijing Normal University. The measure ranges from 0 to 1, and the 0.4 mark is used as a predictor by analysts for social unrest.
Chinese activists inspired by the pro-democracy movements in Tunisia and Egypt have called for nationwide protests, which led to an increased police presence in Beijing, Shanghai, Guangzhou and other cities last month. The activists say the Communist Party should give up power if it doesn’t address the wealth gap, promote an independent judiciary, curb inflation and property prices, and crack down on corruption.
