Europe presses China for stronger yuan

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During a state visit to Beijing, French President Nicolas Sarkozy urged China to let its currency rise more quickly against the euro – a message that EU officials are expected to echo in a visit this week (28 November), as the bloc’s trade deficit with the booming Asian economy soars. 

“We need to arrive at currency rates that are harmonious and fair,” Sarkozy said on 24 November at a joint press conference with his Chinese counterpart Hu Jintao. This means China should “accelerate the appreciation of the yuan against the euro”, he added. 

The yuan, which is still partly pegged to the plummeting US dollar, has fallen by almost 7% against the euro since the beginning of the year, causing a steep rise in already booming imports of cheap goods from the Asian economy. 

Jean-Claude Juncker, Luxembourg’s prime minister and chair of the Eurogroup of finance ministers, said the yuan was now undervalued by 20-25%, giving China an unfair trade advantage.

The EU’s trade gap with China is expected to reach €170 billion for the year 2007 – nearly 30% higher than in 2006 – causing increasing concern among European leaders and business. 

Last week, Tom Enders, chief executive of the EU planemaker Airbus, said the strong euro – which now stands at nearly $1.50 – had “passed the pain barrier”, causing a loss of competitiveness for European companies that is becoming “life-threatening”. He added that Airbus may increasingly have to consider outsourcing production to lower-cost countries, such as China, as it has become unsustainable for it to sell its aircraft in dollars when around half of production costs are paid for in euros. Last March, the company already announced 10,000 job cuts across Europe (EURACTIV 2/03/07). 

Nevertheless, despite the euro’s height, the company, which was part of Sarkozy’s high-level business delegation to Beijing, succeeded in clinching a $17 billion deal with China for the delivery of 160 planes. The deal is considered essential for Europe to keep its foothold in the flourishing Chinese aviation market, as Airbus struggles to compete with its US rival Boeing. 

The French state-owned nuclear energy group Areva also signed an €8 billion deal with China for two nuclear reactors and more than ten years’ worth of fuel. 

The EU wants China to further open up its economy to European business. This will be the message carried by a high-level EU delegation, including Commission President José Manuel Barroso and EU trade chief Peter Mandelson, at a bilateral summit on 28 November. 

Mandelson is expected to warn China that it will face tougher action by Brussels unless it operates a “major change” on investment restrictions, red-tape barriers for EU companies and counterfeiting. 

And, for the first time, the EU delegation will be accompanied by representatives of the euro zone, including Juncker, European Central Bank President Jean-Claude Trichet and the Commissioner in charge of monetary affairs, Joaquín Almunia. They are expected to hammer home the message that letting the yuan rise will also allow the Chinese economy to cool down a little and put a dampener on rising inflation in the country. 

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