Edition: U.S. / Global

China Plans To Maintain Existing Rate For Currency

Published: January 7, 2003

Despite mounting pressure from the United States and Asian neighbors, Chinese officials say they plan to maintain a fixed exchange rate for the country's principal currency because it has helped China achieve strong economic growth even as wealthy countries falter.

Prime Minister Zhu Rongji said the policy of pegging the currency, called the yuan or renminbi, to the United States dollar at a fixed rate had raised record foreign exchange reserves, increased exports and improved China's ''national strength.''

''To stick to the policy is in the interests of our country,'' Mr. Zhu said in a speech to officials who run China's state administration of foreign exchange, reported by state-run news media on Sunday. ''It has effectively safeguarded the country's economic growth and financial stability.''

China's willingness to allow its currency to fluctuate according to market forces is seen by some as a test of its economic maturity and its commitment to participate as a full partner in the global trading system.

As the country's weight in the global economy increases, it has come under pressure to allow the yuan to float just as the dollar, the euro, the Japanese yen and almost all other major currencies do. Both the United States and Japan expected China to move steadily toward free currency trading after joining the World Trade Organization last year.

By controlling the yuan's value rather than allowing it to adjust to supply and demand, China is trying to maintain a price advantage for its exports of manufactured goods, with the effect of depressing prices around Asia and the world, some American and Japanese economists have said.

China makes garments and shoes, household tools and appliances, even semiconductors, mobile phones and laptop computers at prices that most Japanese, American and European manufacturers cannot easily match. China benefits from its huge low-cost labor force, but also from a currency that because of intervention and controls by China's central bank has hardly budged from a rate of 8.2 yuan to the dollar since China's streak of rapid economic growth began in 1994.

Bush administration officials have also argued that China should move toward a free floating currency, but for a different reason: to head off domestic economic problems.

John Taylor, the United States Treasury under secretary for international affairs, said in a speech last week that a floating currency was a crucial ingredient in stable economic growth for large economies. He told reporters after his address that China needed to relax controls on the yuan. ''Over time, they will move toward more flexibility,'' Mr. Taylor said. ''As there is more foreign investment, direct investment and more trade, there will be more reasons to move toward greater flexibility to prevent other imbalances that can occur.''

China's export strategy has been hugely successful. Its trade surplus with the United States has already surpassed Japan's, and grew to $83.1 billion through the first 10 months of 2002, compared with $70.4 billion in the period a year earlier.

Many economists say they believe that the yuan would rise quickly against the dollar if allowed to float, making Chinese exports more expensive and imports less so. Given China's growing economic strength, Goldman Sachs estimated in a recent report that the yuan was undervalued by about 15 percent.

Recent data do suggest that China's relative economic strength is not being reflected in its currency value. Output grew 8 percent last year, faster than in any other major economy, powered in part by surging exports and a huge inflow of $55 billion in foreign direct investment. The central bank's reserves of foreign currency swelled by 35 percent in 2002, to $286.4 billion, Mr. Zhu told state-run news media last week.

At least in part because the exchange rate is fixed, prices within China -- including Hong Kong, which retained its own separate currency, the Hong Kong dollar, after it was returned to Chinese control in 1999 -- have been falling for several years, sapping the profits of major companies even though their sales are growing quickly.

Still, Chinese officials are concerned about keeping the country's present economic vibrancy going through a delicate period of political transition, as a new generation of leaders takes control of China's economic management, beginning in March.

Leading Chinese economists also point out that five years ago, during the Asian financial crises, China also came under heavy international pressure -- to maintain its currency peg, not to break it. The worry in Washington and Tokyo then was that to stay competitive with Asian neighbors that had delinked their currencies from the rising dollar, China might devalue the yuan, potentially destabilizing international markets further.

Mr. Zhu has told foreign guests in the past that China should move toward a more flexible currency regime and allow the yuan to float, but he has taken no steps in that direction recently.

When he retires in March, he is expected to be succeeded as prime minister by his deputy, Wen Jiabao. In the meantime, Mr. Zhu signaled in his speech to the monetary officials that he saw no need to change policy now.

''The stability of the renminbi and the sustained increase in foreign exchange are major signs of the country's improving national strength and healthy economic development,'' he said.