China Central Bank's Ma denies government manipulation of Yuan
(Bloomberg)
Updated: 2006-01-20 09:24

People's Bank of China Assistant Governor Ma Delun said the market is determining the yuan's exchange rate, rejecting U.S. criticism that the government keeps the currency artificially weak to spur exports.

Ma said currency policy wasn't to blame for the U.S. trade deficit. "Workers' pay in China is 1/33rd of that of a U.S. worker," Ma said in an interview in Shanghai on Jan. 18. "The U.S. has to accept this global reallocation of industries."

Senators Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, are sponsoring legislation in Congress that would impose tariffs on imports from China unless the yuan is allowed to appreciate more rapidly. The U.S. government estimates the trade deficit with China widened to $185 billion in the first 11 months of 2005, up 25.4 percent from a year earlier. Treasury Secretary John Snow said on Jan. 6 that he's "not at all satisfied" with China's currency policy.

The yuan's value has risen 0.5 percent against the dollar since a decade-old peg ended in July, compared with a 3.4 percent jump in Korea's won and 4.8 percent advance in Thailand's baht.

China's currency failed to jump this month when the central bank reduced its role by allowing 13 commercial banks including Citigroup Inc., HSBC Holdings Plc and ABN Amro Holding NV to act as market makers, who pledge to offer prices for the currency.

"We're not manipulating the yuan," Ma said. "The U.S. trade deficit is not caused by the yuan. It's easy to explain this to an economist, but those who don't know about finance don't understand this. They should go back to university."

"Lose Face"

The central bank is still the dominant force in the market and may let the currency appreciate only gradually, Shanghai- based economist Gao Shanwen said.

"The Chinese government would never look as if it bows to international pressures in its currency reform, even if it actually does, because that would make China lose face," said Gao, chief economist at Everbright Securities Co. "There's an unspoken consensus between the central bank and market players. Market makers are constantly testing the central bank."

Gao predicts a 3.5 percent advance this year in the yuan, a denomination of China's currency, the renminbi.

European Central Bank President Jean-Claude Trichet and Japanese Finance Minister Sadakazu Tanigaki have joined Snow in saying China's currency doesn't reflect the fact that the economy is growing faster than any other, adding to manufacturing job losses and trade imbalances in more developed nations.

China's trade surplus tripled to a record $102 billion last year, helping to drive economic expansion of more than 9 percent. The nation's foreign-exchange reserves jumped to $818.9 billion at the end of December, the world's second biggest after Japan's.

"Small Appreciation"

China on July 21 reset the yuan's value at 8.11 to the dollar, a 2.1 percent appreciation from the level where it had been held since 1995, and started managing its value against a basket of currencies including the euro and yen. It traded at 8.0673 to the dollar at 3:30 p.m. local time yesterday.

"The small appreciation is decided by the market," Ma said, when asked about the currency's movement since July 21. "Market participants have different views than some outsiders."

Ma, 56, was vice director of the central bank's State Administration of Foreign Exchange for four years until last March. In August, he was named executive vice president of the central bank's Shanghai office, which carries out market operations under guidance from Beijing headquarters.

Questioned on what his forecast for the yuan is this year, Ma responded: "You need to ask the market."

The central bank on Jan. 4 approved banks to start quoting and trading the yuan, ending its role as the sole price-setter for all yuan trades. The central bank now sets a daily reference rate for trading by taking an average of quotes from market makers. The yuan is allowed to trade 0.3 percent against the dollar either side of the daily rate.

Little Movement

Under the market-maker system, the yuan's volatility hasn't increased. The currency's biggest one-day price swing against the dollar this year is 0.03 percent. The biggest fluctuation since the ending of the peg is 0.07 percent on Aug. 11.

"The idea for the yuan market makers is to have the mechanism in place before seeing very volatile trading," said Kenneth Poon, head of local markets trading at ABN Amro in Shanghai, one of five foreign market makers. "It needs time for the market to develop."

Poon said trading is dominated by companies involved in trade, rather than hedge funds or individual investors, because the government limits conversion of currency for investment purposes. He said there was little incentive for banks "to trade more aggressively" in such a controlled environment.

"Actual Needs"

"Trading in China is not based on speculation, but based on actual needs," said Ma. "Not unlike central banks in any other countries, we are the manager and participants of the currency market, and the goal is to maintain stability."

Timothy Condon, head of Asian financial markets research at ING Groep NV in Singapore, said the central bank "still has a big influence on the yuan" and uses the same methods as its overseas counterparts to influence market prices. He predicts a 2 percent gain in the currency this year.

"Some people may think the yuan should appreciate rapidly, but, in fact, it may not," the central bank's Ma said. "It's important to let U.S. politicians understand the currency and what the currency's mechanism is," he said, without naming the lawmakers concerned.

The U.S. Treasury, in a twice-yearly review released in November, didn't name China a currency manipulator, while calling for greater yuan flexibility.

China's expanding foreign-exchange reserves and trade surplus, which was "much more than we expected" in 2005, are putting pressure on the yuan to appreciate, Ma said.

Ma described as "all rumor" reports that China might switch its reserves out of U.S. dollar assets. "We're satisfied with our management of foreign currency reserves," he said.