Wen Defends China’s Currency Policy

The Chinese premier predicts that a steep renminbi appreciation will “bring disaster to China,” foreboding further discord with Western countries.

In Brussels today, Chinese Premier Wen Jiabao urged Europe not to “join the choir” clamoring for a rapid appreciation of his country’s currency. Deviating from his prepared remarks at a business conference, the premier warned that if the renminbi isn’t stable, “it will bring disaster to China and the world. If we increase the yuan by 20, 40 percent as some people are calling for,” he added, “many of our factories will shut down and society will be in turmoil.”

China has capped the appreciation of its currency at 2 percent since it relaxed its peg to the American dollar in June. Western countries continue to allege that China is artificially undervaluing the renminbi to make Chinese exports cheaper — which might undermine recovery in the United States and Western Europe.

In the United States, Congress has already approved retaliatory measures in the form of trade sanctions on China. The Bank of Japan is trying to drive down the value of yen by unexpectedly easing monetary policy. Brazilian Finance Minister Guido Mantega has expressed concern over an international “currency war” erupting.

Last week, the Chinese premier defended his country’s monetary policy in an interview with CNN, noting that not only has the renminbi appreciated more than 50 percent against the dollar since 1994; China still maintains a trade deficit with neighboring Korea and Japan and a deficit in services globally. “China does not pursue a trade surplus,” he said.

His fear of a yuan appreciation driving Chinese workers back to the countryside stems from Wen’s long-held belief that economic growth should be broader and more balanced between China’s industrialized coastal areas and its largely agrarian hinterland. He told CNN that China’s economic development “still lacks balance, coordination and sustainability.” A sudden shift in currency policy would only add instability to China’s business and investment climate.

Wen is in Brussels after attending a summit of Asian and European leaders that has failed to yield any meaningful results besides the signing of a free-trade agreement between the EU and South Korea.

Although Europe has formally sided with the Americans on the currency issue, former Luxembourg finance minister and current prime minister Jean-Claude Juncker formulated a more nuanced position on Tuesday, noting that an “orderly, significant and broad based appreciation of the renminbi would promote more balanced growth.” He did add that the yuan remains “undervalued.”

The euro hit an eight month record high on Tuesday, having risen 16 percent against the dollar and 14 percent against the yuan in the past four months alone. The high exchange rate is making it harder for eurozone exporters to compete. According to Commissioner Olli Rehn for Economic and Financial Affairs, the euro cannot continue to bear “a disproportionate burden in the adjustment of global exchange rates.” The recovery of the eurozone economy may be “weakened” he believes, unless others share in the burden.

The “currency war” is likely to resurface on the agenda during the upcoming G20 summit in Seoul next month.

France will take over the G20 presidency from South Korea next year when it simultaneously chairs the G8. French president Nicolas Sarkozy has championed global financial reform since the crisis hit two years ago and is expected to push for a multilateral accord on currency stabilization. Whether the Chinese are inclined to play ball may become evident when President Hu Jintao visits Paris in November.