A "large" appreciation of the yuan would hurt China's economy, Vice Premier Wu Yi said, signaling the nation won't cave in to U.S. demands for faster gains to ease the U.S. trade deficit.
The yuan's value isn't the cause of the deficit, Wu said today at a dinner in Washington attended by U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke. About 85 percent of China's surplus with the U.S. is from foreign companies exporting products no longer made in the U.S., such as shoes, she added.
Vice Premier Wu concluded two days of talks with Paulson yesterday aimed at easing U.S.-China trade tensions. U.S. legislators have pledged to proceed with sanctions on Chinese imports unless the yuan climbs faster than its 8 percent gain against the dollar since July 2005.
"China will definitely not drop its policy of letting the yuan rise gradually," said Xiao Minjie, a senior economist at Daiwa Institute of Research in Shanghai. "A big yuan appreciation would affect China's exports," Xiao said, citing the textile industry.
China's reluctance to let the yuan rise faster is because stronger currency would hurt company profits and jobs. The textile industry, which accounted for 72 percent of China's trade surplus last year, loses 8.2 billion yuan of profits for every percentage point of currency appreciation, the China National Textile and Apparel Council estimates.
The yuan was little changed at 7.6527 against the dollar as of 9:46 a.m. in Shanghai, compared with 7.6519 late yesterday.
40 Percent Undervalued
Democratic Representative Sander Levin of Michigan, who chairs the trade panel of the House Ways and Means Committee, said yesterday the yuan is undervalued by as much as 40 percent.
"Large scale yuan appreciation will have a negative impact on China's economy," Wu said, adding that trade protection would hurt relations between the U.S. and China.
China last week increased the amount its currency can appreciate by widening the bands within which it can fluctuate against the dollar to 0.5 percent from 0.3 percent.
"China will continue to reform its exchange rate on its own initiative, gradually," Wu said.
The trading band will continue to widen and China will increase the yuan's flexibility, Wu said. Still, China needs to guard against currency risks, she said.
Yuan Flexibility
People's Bank of China Governor Zhou Xiaochuan also said this week that China plans to further increase flexibility in the yuan's exchange rate.
Wu met with U.S. President George W. Bush earlier today. Bush later told reporters the U.S.-China relationship was "complex" and that two nations must work together to ease economic tensions. The U.S. posted a record trade deficit of $232.5 billion with China last year.
The U.S. is "watching very carefully" China's steps on its currency, Bush said, and is prodding China's government to open its capital markets to international financial institutions.
China is taking steps to encourage consumers to spend and will become the world's second-largest domestic market after the U.S. by 2010, Wu said.
