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China expects yuan reform to hit exports

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Bloomberg

China’s pledge for a more flexible yuan will slow the nation’s exports this year, adding to difficulties that include the European debt crisis and rising costs, a Chinese government official said.

“I’m not optimistic about the exports this year,” Yu Jianhua, a Ministry of Commerce director general, told reporters on the sidelines of Group of 20 meeting in Toronto yesterday. “It’s essential for exporters to cut cost and keep their share in the world trade market.”

China indicated on June 19 that it was scrapping the yuan’s two-year-old peg to the dollar and reiterated the aim at a media briefing yesterday. The move may have muted criticism from US President Barack Obama and other world leaders ahead of the G-20 talks.

 

Obama yesterday told Chinese leader Hu Jintao that the US welcomed China’s move to allow greater flexibility of its currency and seeks a greater balance on trade, administration officials said.

Obama told Hu the decision was an important step in rebalancing the global economy and that “implementation of it will be very important,” Jeff Bader, director of Asian affairs on Obama’s National Security Council, said in a briefing after the two leaders met.

Raise consumption
China, the world’s largest exporter, is aiming to raise consumption and reduce reliance on exports. Measures will include a structural tax cut of about 500 billion yuan ($73.6 billion) this year and more subsidies to low-income families, according to Ministry of Finance director general Zheng Xiaosong.

“Our major task is to adjust the economic structure, and the exchange rate regime reform is in line with this strategic goal,” Ma Xin, a director at the National Development and Reform Commission, said yesterday.

The exchange rate reform was, and should be, determined by China’s economic fundamentals, not foreign pressure, Ma said.

China’s decision will also help it control inflation and avoid asset price bubbles, said Zhang Tao, head of the international department at China’s central bank. He told reporters in Toronto that regime reform was “welcomed by the world” and he hasn’t seen any change in pressure from the G-20 countries on the issue.

In a statement released earlier from the Group of Eight meeting that concluded yesterday in Huntsville, Ontario, leaders didn’t mention the Chinese currency.

‘Dramatic drop’
China’s economic growth accelerated to 11.9 per cent in the first quarter, the fastest pace in almost three years. The nation is poised to surpass Japan this year as the world’s second-largest economy, after overtaking the US as the biggest auto market and Germany as the biggest exporter in 2009.

The nation’s trade surplus has posted a “dramatic drop” after the financial crisis, according to Yu. The trade surplus fell to $35.4 billion in the first five months of 2010, compared with $78 billion in the same period in 2008, Yu said.

Hu yesterday said China is seeking to “strengthen the communication and coordination” with the US and that there has been “real progress” toward better ties. Obama said China and the US have been working to build a relationship of “trust and mutual confidence” in dealing with the economy and security issues. Obama also invited Hu to the US for a state visit. No date has been set.

Some lawmakers in the US Congress are pressing for tougher actions to force China to revalue the yuan, including letting US companies seek tariffs on Chinese imports.

The US trade deficit with China reached $71 billion for the first four months of the year, up 5.7 per cent from the same period of 2009, according to US government data.

The yuan gained 0.5 per cent this week, the most since December 2008. China’s central bank fixed the reference rate at 6.7896 per dollar on Friday, 0.3 per cent stronger than the day before and 0.15 per cent higher than the close in the spot market. The yuan is allowed to trade 0.5 per cent on either side of the daily fixing.

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First Published: Jun 28 2010 | 12:12 AM IST

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