China resists European pressure on currency

China resists European pressure on currency
October 10th, 2007  

Topic: China resists European pressure on currency

China resists European pressure on currency
The European Union and China locked horns over exchange rates on Tuesday after authorities in Beijing deflected a European call for a rise in the level of the renminbi.
Only hours after eurozone finance ministers said the renminbi’s exchange rate should more accurately reflect the country’s vast and growing current account surplus, China’s central bank set a noticeably low official reference rate for the currency against the dollar.
Market participants interpreted the action as a signal that China has no intention to yield to foreign pressure for a faster appreciation of the renminbi against the currencies of its western trade partners, although there was no firm evidence of this.
A foreign ministry spokesman repeated Beijing’s well-honed official line, saying the government would allow the currency to become more flexible “over time”.
“We are willing to engage in dialogue and consultation with concerned parties on this issue,” he said at a regular news briefing.
The EU is frustrated with the euro-renminbi exchange rate not only because of China’s ever-increasing trade surplus with Europe, but also because the dollar’s decline means the euro is bearing the brunt of China’s reluctance to allow an appreciation of its currency.
“China and other emerging nation economies should introduce more flexibility in their exchange rate management. This is good for China’s growth,” Joaquín Almunia, the EU monetary affairs commissioner, said before the start of an EU finance ministers’ meeting on Tuesday.
China pledged to manage the renminbi against a basket of global currencies when it broke its decade-old US dollar peg in mid-2005. But the currency since then has appeared to track the greenback rather than trade more broadly.
The 13-nation eurozone’s ministers broke new ground on Monday night with a statement that for the first time identified the renminbi’s level as a greater source of concern to Europe than the level of the dollar or yen.
“First point China, second point dollar, third point yen,” said Jean-Claude Juncker, chairman of the eurozone finance ministers’ group.
The ministers also announced that Mr Almunia, Mr Juncker and Jean-Claude Trichet, the European Central Bank president, would travel to China before the end of the year for high-level discussions on exchange rates and other issues.
While the European trade deficit with China has continued to grow this year, the renminbi has fallen by at least 5 per cent against the euro over the past two years. In the same period, the Chinese unit has strengthened by just under 10 per cent against the dollar.
However, the strong words on China obscured to some extent the European ministers’ inability to find common ground for a tough statement on the dollar’s fall last week to all-time lows against the euro.
The ministers confined themselves to noting “with great attention” that US policymakers had stated a strong dollar was in the US economy’s interests – an observation that US officials would have little difficulty in endorsing.
For many eurozone ministers the problem was that the use of stronger language against the Americans might have risked playing into the hands of France and its unremitting public campaign against the ECB.
Nicolas Sarkozy, France’s president, and his government have demanded that the ECB play a more active role in bringing down the euro against the dollar, if necessary by cutting interest rates. But Germany – backed by Austria and the Netherlands among others – are wary of any initiatives that risk compromising the central bank’s independence from political interference.
The result was a relatively mild statement on the dollar, even though some European representatives plan to raise the issue more forcefully at a meeting of Group of Seven countries in Washington on October 20-22.
Christine Lagarde, France’s finance minister, said she was happy with the joint statement on exchange rates. “After good debates, we came to final conclusions that we shared and that we all support in anticipation of the G7 meetings. So that’s good, that’s excellent,” she said.

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