Yuan must strengthen, China told

Nanjing: China should let its currency strengthen against the euro and other major currencies, for its own sake as well as that of the global economy, top finance officials of the single-currency euro zone said on Sunday.

The plea to Chinese Prime Minister Wen Jiabao for faster movement on exchange rate reforms, to reverse the euro's climb against the yuan came in meetings ahead of an EU-China summit today in this eastern Chinese city.

"We think an orderly and gradual appreciation of the renminbi would be in the best interests of China and of the global economy," said Luxembourg Prime Minister Jean Claude Juncker, who heads economic talks among the 16 countries that use the euro.

The meetings come amid worries the rising euro could derail the recovery of a region competing with exports from China, whose currency is linked to the weakened US dollar.

Juncker and fellow euro zone leaders described the discussions with Wen, China's central bank governor Zhou Xiaochuan and other top economic officials as "frank but friendly."

Domestic demand

Faster change would give China more leverage over its own economic policy, and give its citizens greater purchasing power, boosting domestic demand — a key requirement for balanced, sustainable growth, Juncker said.

China has pledged to allow the yuan's value eventually to be set by market supply and demand, but has balked at major changes its leaders say might destabilise the financial system.

"I can't say I am more optimistic than I was before I came here," Juncker said, though he added he felt the exchange was worthwhile.

There was no immediate word from the Chinese on their response to the appeal for a respite from the upward pressure on the euro, which is a bane for exporting countries like Germany, the single-currency bloc's largest economy.

After yesterday's meetings, the official Xinhua News Agency reiterated a comment by Beijing's vice foreign minister, Zhang Zhijun, pledging to "give play to the fundamental role of market supply and demand in setting the yuan exchange rate, and keep it basically stable around reasonable, balanced levels."

In the last month or so, the euro has risen to a 15-month high of $1.5061, and any successful intervention to stem the dollar's fall against the euro likely has to involve the Chinese.

The yuan began gaining against other major currencies with a set of exchange rate reforms introduced in July 2005. But after rising nearly 20 per cent against the US dollar, the Chinese currency has hovered around 6.83 to the dollar for more than a year as Beijing sought to protect local exporters battered by the global economic crisis.

Criticism

As the dollar has weakened against the euro in recent months, so has the yuan, giving Chinese manufacturers an edge in overseas markets.

China also faces complaints from the US over its currency controls, and from other emerging economies that complain the weaker yuan means Chinese products cut into their fair share of the global marketplace.

Recently, there have been signs of a solid recovery in exports, which saw their smallest fall in ten months in October, as the trade surplus nearly doubled from September to $24 billion (Dh88.08 billion).

Now that China's economy is leading a nascent global recovery, with growth forecast to exceed 9 per cent in the final quarter of 2009, it is time for a change, the euro zone leaders said.

"It would be good from all angles of vision, the bilateral relationship, the multilateral relationship and, we trust, the interests of the Chinese authorities ... to have an orderly and gradual appreciation of the [yuan]," said European Central Bank President Jean-Claude Trichet.

On Friday, the dollar gained against the euro briefly as currency markets gyrated after Dubai World, a government investment fund with debts of about $60 billion, asked creditors to postpone payments until May.

US borrowing

But the reprieve for the euro was expected to be short-lived, given the immense borrowing needs of the US, which relies heavily on foreigners to finance budget deficits exceeding $1.4 trillion annually.