Yuan to remain stable, China tells EU

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Chinese Prime Minister Wen Jiabao last week ruled out an appreciation of the renminbi, reiterating his stance that the national currency will be kept stable on a “reasonable and balanced basis” at an EU-China meeting held ahead of a crucial G20 summit in London this April.

Addressing critics of his country’s policy of maintaining its currency at an artificially low value, Wen underlined that since 2005 the renminbi’s (also known as the yuan) value has appreciated by 20%. He reiterated China’s objective of keeping “the stability of the currency on a reasonable and balanced basis”.

European Commission President José Manuel Barroso said the EU and China share same interests for “new supervisory and regulatory mechanisms at global level,” stressing the importance of an upcoming gathering London in April to follow-up on the November 2008 G20 summit in Washington, DC.

Despite being divided and reluctant to explicitly push for change, European diplomats have voiced concerns in the past about the artificially low value of the renminbi. In an internal document circulated ahead of the November G20 summit, the incumbent French EU Presidency asked for “broader reflection on the inadequacies of the current international monetary system,” which stood accused of “encouraging the sterile accumulation of reserves and diverting the monetary flux of productive investments in developed countries as well as in developing countries”. However, the document did not receive the unanimous backing of the 27 EU members (EURACTIV 03/11/08).

So far, the United States has been the main backer of China’s monetary policy. In fact, Beijing has been heavily reinvesting its huge commercial surplus in US securities, which helped inflate the financial bubble until it burst a year ago. But the crisis and the new Obama administration are changing the terms of the alliance.

Indeed, the current crisis has decreased the urgency of intervention regarding the renminbi, which has been gaining value against a falling euro since August, when the financial turmoil started to hit Europe harder. In January 2009, the euro lost almost 18% of its value against the renmimbi compared to January 2008.

Olivier Blanchard, chief economist at the International Monetary Fund (IMF), last Wednesday (28 January) played down the importance of the Chinese exchange rate “given that it is not a central element of the world crisis”.

The EU ran a trade deficit with China worth €160 billion in 2007. European businessmen maintain that the imbalance is the result of barriers to trade raised by the Chinese authorities, but also point out that it is in part caused by an artificially low exchange rate between the renminbi and the euro.

Alongside the elimination of administrative trade barriers, Europe is intermittently trying to convince China to correct the currency exchange imbalance, pushing Beijing to focus more on its growing internal market rather than on exports.

China's depreciated currency and low labour costs keep Chinese exports cheap for European consumers. As a consequence, China is now Europe's biggest source of manufacturing imports, while just two decades ago there was almost no trade at all between the two giants. 

As a result, European industries that have been slow to adapt to the global market over the past decade have been severely hit by the new Asian competition, with the textiles and steel sectors suffering the most.

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