As China's low currency helps drive its economic recovery, its success is sparking resentment among neighbouring countries.
The unofficial pegging of the yuan to the U.S. dollar, which has held steady at about 6.83 for more than a year, has helped keep Chinese exports flowing. But it is also making its Asian neighbours rethink their own policies, for fear their rising currencies will price their exports out of the global market.
U.S. calls for China to ease its currency policy were renewed this week ahead of tense trade talks yesterday between Commerce Secretary Gary Locke and Chinese Vice-Premier Wang Qishan in the Chinese city of Hangzhou. Though currency was not on their agenda, the value of the yuan has contributed to recent trade disputes and Mr. Locke called for "more progress" in letting the yuan rise.
A day earlier, Bank of Canada Governor Mark Carney said China is "running great risks" with its policy of buying U.S. dollars to control the value of the yuan. China "engages in persistent, actual intervention," he told the Senate banking committee in Ottawa.
Governments in South Korea, Thailand, Singapore and Malaysia, meanwhile, are under pressure from their business leaders and entrepreneurs to follow China's lead and keep currencies low to ensure their own economic recovery.
In South Korea, Finance Minister Yoon Jeung-hyun warned this week he will intervene if the country's currency is pushed too high. "If there is an excessive movement [of the local currency] the government will not just sit and watch," he said.
Taiwan's central bank bought up $500-million (U.S.) in a single day this month to keep the Taiwanese dollar from rising.
In Thailand, where the central bank already intervened once this month in the baht's appreciation, the bank's governor has warned she might intervene again, amid warnings from exporters that they are being hit hard by competition from China. "Ongoing baht strength will harm Thai shipments and weaken our competitiveness," Pornsil Patchrintanakul, deputy secretary-general of the Board of Trade of Thailand, told the Bangkok Post this month.
Singapore's central bank, meanwhile, has formally decided against adopting policies that would encourage its dollar's appreciation, even though its GDP grew 14 per cent in the third quarter.
David Cohen, director of Asia economic forecasting for Action Economics based in Singapore, said the rise in the regional currencies has been modest - merely recovering to the pre-crash levels of last year, rather than soaring to new heights.
Still, the governments are watching China with unease. "They are nervously watching what happens going forward. They don't want to lose any more competitiveness to Chinese exports," Mr. Cohen said.
"They have been intervening over the past couple of months. Without intervention, most of [the currencies]would have appreciated even more over the past couple of months and of course so would the Chinese yuan have, if not for intervention by Chinese authorities," he said.
Instead, the Chinese yuan has remained steady. As a result, though September's exports were down 15.2 per cent year on year, the pace of decline in exports has slowed and a researcher in the Chinese government-connected Development Research Centre said he expects exports to grow 10 per cent in 2010.
As long as China's exports are declining, however, most economists warn not to expect a change to its currency policy until at least mid-2010, so focused are officials on maintaining China's GDP growth.
"According to our projections, until there's a noticeable improvement in exports, the exchange rate will not see a major adjustment," Jiang Jianjun, deputy director in the Ministry of Commerce's Department of Foreign Trade, told an economic forum in Beijing this week.
Though Mr. Jiang noted there is mounting pressure to allow the yuan to increase in value, in no small part due to China's increasing foreign exchange reserves, he also said it could take two to three years for exports and imports to return to pre-crisis levels.
There is mounting speculation that China's central bank will back away from its current policy some time next year, driven by both currency speculators and the fear of inflation. Last week, the State Council warned that China will need to adopt policies to "better manage inflationary expectations."
"It's becoming clear to the Chinese government the benefits of having a stronger currency, so I think when they do move, they'll appreciate it," said Alaistair Chan, associate economist at Moody's Economy.com. However, he warned that authorities are not likely to opt for a one-time surge in value, opening the door to market speculation.
Other economists have suggested that a modest increase, to about 6.4 yuan to the dollar, is likely by the end of next year. But that move is not likely to come soon from the Chinese government. "At the end of the day, they're going to look at what's in their interest when they make their move," Mr. Chan said.