Obama Can’t Avoid Immovable Yuan as Dollar Sinks Asia (Update2)

By Bloomberg News
Nov. 13 (Bloomberg) -- President Barack Obama may find on his Asian visit that began today that discontent about China’s currency peg to the dollar isn’t confined to Washington’s lawmakers and business lobbyists.
From Mumbai-based Alok Industries Ltd., which supplies Wal- Mart Stores Inc. with textiles, to Bangkok-based semiconductor packager Hana Microelectronics Pcl, Asian companies say Chinese rivals have an unfair advantage because of the yuan-dollar link.
The dollar has declined 14 percent in the past year against the currencies of six major trading partners.
In meetings at the Asia Pacific Economic Cooperation summit in Singapore and then in Beijing, Obama probably will discuss China’s fixed-rate policy, which has prompted central banks in India, South Korea, Thailand and Taiwan to accelerate dollar purchases to curb currency appreciation.
"It’s just outrageous, the impact on their neighbors and on relatively poor countries," said Simon Johnson, chief economist at the International Monetary Fund in 2007 and 2008 and now a senior fellow at the Peterson Institute for International Economics in Washington.
As Obama seeks to push the Group of 20 goal of rebalancing the world economy from excessive U.S. consumer spending and Asian exports, South Korea’s won gained 8 percent against the yuan in the past six months. Japan’s yen has risen 6 percent, while India’s rupee gained 6 percent and the Thai baht 4 percent.
The yuan is a denomination of China’s currency, the renminbi.

Capital Flows

The People’s Bank of China this week said foreign-exchange policy will take into account global capital flows and changes in major currencies and scrapped language in a previous report to keep the yuan "basically stable." The economy expanded by
8.9 percent in the third quarter from a year earlier.
"There has been a subtle message sent that as China’s economy starts to recover, it’s probably appropriate for the PBOC to move back to a managed float," Stephen Roach, chairman of Morgan Stanley Asia in Hong Kong, said in an interview. A shift may not be imminent and wouldn’t reach the 15 percent to 20 percent that some U.S. lawmakers have demanded, he said.
Investors see a rising yuan. Twelve-month non-deliverable forwards for the yuan rose 0.2 percent to 6.5925 per dollar as of 3:33 p.m. in Shanghai, signaling trader bets on a 3.5 percent gain from the spot rate of 6.8259. China has kept its currency at about 6.83 per dollar since July 2008, after a 21 percent gain the previous three years.

‘Some Progress’

"This is a more multilateral issue and I am glad the G-20 is looking into it," Bimal Jalan, former governor of the Reserve Bank of India and a retired lawmaker, said in an interview from New Delhi.
Mahindra & Mahindra Ltd., India’s largest sport-utility vehicle maker, says it is unfair to compete with China in global exports when the rupee floats and the yuan is fixed.
"There should be world pressure on China to respond more to global market forces and play the game right," Managing Director Anand Mahindra said in an interview in Singapore.
Banks are predicting that an end to the yuan’s peg will allow currency gains across the region. The won will gain 7 percent by the end of the third quarter of 2010 as both the yuan and the rupee appreciate by 3 percent, according to the median forecasts in separate Bloomberg surveys of analysts.

Buying Contracts

"Over time the yuan will gradually appreciate against the U.S. dollar," said Michael Hasenstab, who oversees $45 billion of fixed-income investments at Franklin Templeton Investments in San Mateo, California and whose $13.2 billion Templeton Global Bond Fund has beaten 98 percent of peers during the past five years, according to data compiled by Bloomberg. He bought yuan forward contracts last year. "The economic recovery is pretty strong in China."
China’s purchases of dollars to prevent appreciation gave it foreign-exchange reserves totaling $2.3 trillion in the third quarter, the world’s largest. The country is the biggest foreign holder of U.S. government debt, with $797.1 billion in August, up 10 percent from Jan. 1, Treasury data show.
APEC forum finance ministers called for "market-oriented exchange rates that reflect underlying economic fundamentals"
in a statement released in Singapore yesterday. They stopped short of naming any currencies.
Obama, 48, and his Chinese counterparts are unlikely to clash on the yuan as he seeks broader cooperation on avoiding trade disputes between the two countries, said Kenneth Rogoff, a professor at Harvard University in Cambridge, Massachusetts and former IMF chief economist.

Bargaining Power

"The Americans have very little bargaining power at the moment," Rogoff said. "This is going to end when the Chinese decide they don’t want it any more, they want to have a more domestically oriented growth strategy."
Treasury Secretary Timothy Geithner said yesterday that Asian countries had shown a "commitment to moving over time to a more flexible market-determined exchange system. We’ve seen a lot of progress in that direction over the last several years,"
he said in a Bloomberg Television interview in Singapore.
In Washington, Senator Christopher Dodd was less optimistic.
Asked in a Nov. 11 Bloomberg Television interview whether Obama should discuss the yuan, the Connecticut Democrat and chairman of the Banking Committee responded: "He’s got to raise that issue. You can’t give your competitor, your adversary in this case, a 40 percent advantage in global economies."

Congressional Legislation

Steelmakers such as Nucor Corp., the second-largest U.S.- based steelmaker by sales, unions such as the United Steelworkers, corn growers and textile companies have ramped up pressure on Congress to enact legislation aimed at forcing China to raise the value of its exchange rate.
"They’ve had a pretty good deal for a long time," AFL-CIO President Richard Trumka said yesterday at a Washington conference hosted by Bloomberg Ventures, a unit of Bloomberg LP, parent of Bloomberg News. "They’ve not played by the rules."
China’s trade surplus will probably be half last year’s level at $200 billion, which means less pressure on the yuan to appreciate, said Liu Yuhui, director of the Center for Chinese Economic Evaluation in Beijing at the Chinese Academy of Social Sciences, which advises the government on policy.
"As global trade is still shrinking, which government would prefer a stronger currency?" he asked. "Most calls for a stronger yuan now come from Europe and other emerging-market countries. Pressure from these countries alone isn’t strong enough. The U.S. doesn’t want a stronger yuan because that would cause a collapse in the dollar in the short term."

Stimulus Help

Goldman Sachs Group Inc. yesterday reiterated its three, six and 12-month forecasts for the yuan to stay at 6.83.
Asian nations may also be reluctant to criticize: China’s 4 trillion-yuan ($586 billion) stimulus plan is helping lift their economies from recession. Chinese demand for minerals boosted the Australian economy enough to make it the first country to raise interest rates in the Group of 20.
Asian companies say their governments should take a tougher line.
"Southeast Asia is at a competitive disadvantage if the yuan is linked to the declining dollar," said Richard Han, chief executive officer at Hana Microelectronics, which competes against Chinese companies.
Han, who also has operations in China, said a rising yuan would further erode any advantage Chinese companies have over rivals in southeast Asian nations. "China is becoming less and less competitive to Thailand," he said.

Indian Exporters

Alok Industries, which has invested $1 billion in clothing and textile factories in the past five years to match its Chinese rivals, said it will be "difficult" to maintain its current growth pace as a stronger rupee puts pressure on profit margins.
"Indian exporters are getting hit," Chief Financial Officer Sunil Khandelwal said in an interview in Mumbai. "China now has considerably less international pressure to reform the yuan and capital flows are pressuring the rupee higher."
Chinese export manufacturers are enjoying their currency’s weakness. Rugged Tu, 33, a sales manager at electric toothbrush- and razor-maker Zhejiang San’an Industry Co., said sales to Europe increased 20 percent this year, as the yuan fell 9 percent against the euro, and remained stable for the U.S.
"I hope the yuan exchange rate will stay steady," Tu said in a Hong Kong interview. "It matters a lot for the export market, which is very important for China."

More Dollars

Asian central banks this year have increased their holdings of U.S. dollar assets, including Treasuries, to prevent their currencies from appreciating and thus making exports more expensive relative to China’s. While China’s holdings of U.S.
Treasuries rose 10 percent this year, Japan’s increased 16 percent and those in the rest of Asia by 25 percent, according to Bloomberg data.
At the same time, China’s Asia hand has strengthened: It has replaced the U.S. as the biggest trading partner for most of the region’s economies. In 2002, U.S. two-way trade with Japan, South Korea, Thailand, Indonesia, Malaysia and Singapore exceeded Chinese trade with those countries. In 2008, each of those countries traded more with China than with the U.S.
"The dam is really going to burst if America’s can-do president can’t convince the Chinese that it is in their own self-interest to deal with this threat to the global economy,"
said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. "No nation on its own can enjoy a trade advantage that benefits its own citizens to the detriment of those in the rest of the world forever."