Senior European economic leaders have failed in their bid to persuade China to allow its currency to appreciate, dashing hopes of taking pressure off struggling European exports and the soaring euro.
Jean-Claude Juncker, prime minister of Luxembourg and chair of the Eurogroup of finance ministers, warned yesterday following talks with senior Chinese officials that it was difficult to justify the yuan's depreciation against a basket of currencies, given China's rapid economic growth.
"We think an orderly and gradual appreciation of the [yuan]would be in the best interests of China and of the global economy," Mr. Juncker told a press conference in Nanjing, after meeting Chinese Premier Wen Jiabao. However, he acknowledged that he was not "more optimistic than I was before I came here" about the prospects for a change in China's currency policy.
The summit, which also included European Central Bank president Jean-Claude Trichet, Joaquin Almunia, the European Union's Economic And Monetary Affairs Commissioner, Chinese Finance Minister Xie Xuren and People's Bank of China governor Zhou Xiaochuan, was only the second ever such meeting between the Eurogroup and China, and the first since 2007.
Its urgent focus on China's currency policy and on trade imbalances between the two regions demonstrates Europe's struggle to recover from the economic downturn.
China has kept the yuan effectively pegged to the U.S. dollar for about 16 months, as free-floating currencies like the euro have seen their value skyrocket next to the struggling greenback. China is the European Union's second-largest trading partner after the United States. But EU exports to China fell to €37-billion in the first half of 2009, compared with €39-billion in the first half of 2008, while imports decreased to €103-billion from €112-billion. As a result, the EU's trade deficit with China dropped from €73-billion in the first half of 2008 to €65-billion in the first half of 2009.
The trade relationship between the two has become increasingly acrimonious in that time. China filed a complaint to the World Trade Organization last summer over anti-dumping duties imposed by European countries on imports of its steel wire rods; Chinese exports of shoes and some solar-power technology have also been subject to European charges of dumping, while China has placed anti-dumping tariffs on imports of European nylon in apparent retaliation.
In one apparent conciliatory move, China announced yesterday that it would review anti-dumping measures against chloroform imports from the EU, South Korea and the United States. But analysts have warned that more heated trade battles will be inevitable if China's currency remains at its current low value.
"Traditionally, the euro zone has been quite quiet on [the currency]issue. A lot of Europeans tend to think the imbalances are a U.S.-China problem," said Stephen Green, head of China research at Standard Chartered Bank. He said European countries are suffering "quite a bit" from the yuan's low exchange rate but anticipates no change in its value until the second quarter of next year. "If [the euro zone is]pushing on the currency as well, that is a sign they are becoming more American."
Despite brief acknowledgment this month from the central bank that the yuan must eventually appreciate, Chinese officials appear loathe to change their present currency policy, at least until their country's economic recovery has stabilized. Last week, Chinese vice-foreign minister Zhang Zhijun told journalists the country would keep the yuan "basically stable around reasonable, balanced levels."
Mr. Juncker told journalists yesterday that Chinese officials said they faced a hard sell to their citizens to back a rise in the yuan's value; the delegation was also told the yuan would eventually be allowed to return to a slow appreciation.
China's GDP growth is forecast to reach 8.4 per cent by the end of the year, but economists warn it is based largely on the massive, 4-trillion yuan government stimulus package unveiled a year ago. Late last week, the ruling Communist Party Politburo decided to extend that program into 2010, to "focus more on improving the quality and efficiency of economic growth."
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