Will China Appreciate The Yuan?

The face-off between the U.S. and China regarding the U.S. demands for an appreciation in the Yuan continues unabated. In the recent past, China has denounced the U.S. pressure for this action. This coupled with other tensions between the two countries have given rise to the view that Beijing will not yield to foreign pressure on Yuan appreciation. However, it is domestic opinion favoring a stronger currency that will ultimately prevail when China takes a look at its policy.

For China, maintaining its economic strength is a non-negotiable goal and if it feels that an appreciation in the Yuan will help in furthering this goal it will do so. The fact that this action may be interpreted as caving into U.S. pressure will not deter China from taking a decision, which is necessary to maintain its economic strength. As Li Wei, the head of the Americas division in the Commerce Ministry’s research unit, said, “If we didn't adjust the exchange rate just because of U.S. pressure that really would be manipulation. China is still moving toward market-based reforms of its exchange rate, but is waiting for the economy to improve. The main thing is that we will do it according to our own judgment.” Li went on to say that it seems likely that by the second half of this year when the global economy strengthens and Chinese exporters are on a more solid footing China is likely to resume appreciation of its currency.

Meanwhile, the U.S government is under pressure to call China a ‘currency manipulator’. This label has not been used since 1994 and the possibility of it being used for China has obviously made Chinese officials strongly oppose it. Yet, China may acquiesce to live with such a label. As Tao Xie, an expert on Sino-U.S. relations at the Beijing Foreign Studies University, puts it, “Calling China a manipulator and passing some kind of punitive legislation are different. A label does not come with any punishment.” However, signs are visible that China is indeed preparing the ground for an appreciation of the Yuan.

Local opinion in Beijing has always been that a stable Yuan helped the Chinese economy as well as global recovery. In recent times, there have been some subtle changes. State newspapers have been bringing out reports about officials going to the export hubs to evaluate how firms will cope with the Yuan appreciation. In a recent press conference, Zhou Xiaochuan, China's central bank governor, described the “special Yuan policy” as a temporary stimulus policy that would end “sooner or later.” While the tussle between the U.S. and China on this issue continues to make headlines, in reality, it is the forecast of a rise in both exports and inflation that will determine the direction for the Yuan.