Cover Story

Breaking Up a Bipolar Argument


Is China’s currency too cheap? That’s a familiar debate between American leaders, who favor a stronger yuan, and Chinese officials, who say it is valued properly. Now a number of Chinese business executives are coming forward—and speaking in favor of the U.S. position.

Lenovo (LNVGY) CEO Yang Yuanqing says currency appreciation would boost Chinese consumers’ purchasing power. “We may not worry too much about exporters if we can conduct more yuan-denominated trade,” he told reporters in March. Qin Xiao, chairman of China Merchants Bank, says an end to the yuan’s peg to the dollar would let lenders set market-based interest rates. And Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group, says a stronger currency would cut import costs. “Yuan appreciation will bring us benefits because we import several billion yuan worth of ore every year from abroad,” he told Bloomberg News.

While these comments conflict with those of Premier Wen Jiabao, who said on Mar. 14 that criticizing the exchange-rate policy amounted to “protectionism,” they are in line with traders who expect the government to let the yuan appreciate later this year. Wen has kept the yuan at about 6.8 per dollar since July 2008 to protect China’s exporters during the global recession, after a 21% advance in the previous three years. Contracts linked to its future value predict the currency will break its dollar link by July.

U.S. lawmakers have called on President Obama to use the threat of trade sanctions to force an end to a currency regime they blame for hurting U.S. manufacturers’ competitiveness. As Chinese business leaders speak out, it becomes possible for Beijing to act without being seen as bending to U.S. pressure. “A coordinated message with these leaders changes the narrative,” says Daniel Michaeli, a Sino-American relations expert who runs the Asia Ruminations blog.

“We need to emphasize the benefits of yuan gains,” Zhang Yanling, vice-chairman of Beijing-based Bank of China, the nation’s biggest foreign-currency lender, told Bloomberg News. “The U.S. should also be talking about both aspects of the issue. We shouldn’t politicize it or become emotional.”

Companies in low-margin Chinese industries, such as textiles and furniture, stand to lose the most from appreciation, said Zhang Wei, vice-chairman of the China Council for the Promotion of International Trade; some may even face bankruptcy, he said. Companies with dollar exposure will fare better. China Eastern Airlines, the nation’s No. 2 carrier, would increase profits by 280 million yuan ($41 million) for every 1% annual yuan gain because of its dollar debt, President Ma Xulun said at a shareholders’ meeting in March. The airline’s shares climbed 17% in the past month in Hong Kong, compared with 4% for the MSCI China Index. Morgan Stanley (MS) has estimated that a 5% appreciation in the yuan this year would have an average 2% positive impact on Chinese companies’ earnings.

Chinese bankers blame the yuan peg for disrupting money markets. China’s dollar purchases to maintain the link have driven currency reserves to $2.4 trillion and have flooded the financial system with yuan. Chinese investors held $889 billion of Treasuries on Jan. 31, the biggest overseas holders of such debt.

MARKET-DRIVEN RATES

With China’s benchmark deposit rate now 2.25%—less than the country’s rate of inflation but far above near-zero U.S. rates—the central bank can’t raise rates without attracting speculative capital. “If we don’t reform the exchange-rate regime, how can we price interest rates based on the market?” asks Qin of China Merchants, the nation’s No. 5 lender.

Other Chinese business leaders caution the Americans to be careful what they wish for. Says Bank of China’s Zhang: “If the yuan is expected to be a strong currency, neighboring countries will prefer to hold the yuan instead of the dollar. Will this be good for the U.S.?”

With Frederik Balfour, Irene Shen, Luo Jun, Michael Forsythe, Garfield Reynolds, and Shiyin Chen

Cao is a reporter for Bloomberg News.

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