China will be “ready” to deal with the currency exchange rate issue when its global partners begin to withdraw their stimulus packages, the deputy head of China’s central bank said Saturday. The role of the yuan will be augmented next year following implementation of the China-Asean Free Trade Area, creating a market of almost 2 billion people
Asean statistics show the trade value between the regional grouping and China increased from US$59.6 billion (Bt1.98 trillion at today’s rate) in 2003 to $171.1 billion in 2007, a growth rate of about 30 per cent a year.
The centralbank chief was quick to add that the increasing role of the yuan will be gradual, as China still had to meet several challenges – from allowing its currency to be fully convertible and liberalising its financial markets to improving transparency in its rules and regulations.
The key player is China, which has the largest surplus. Additionally, other East Asian countries are rationally reluctant to adjust their currencies absent a Chinese revaluation, as they fear losing competitiveness. This means China’s refusal to significantly revalue its currency against the dollar is forcing a lop-sided adjustment process that places the burden of rebalancing the US trade deficit exclusively on Europe. That is imposing a deflationary burden on Europe that could easily undermine the European economy.
In a sense, Europe now finds itself involuntarily on the same path that the US voluntarily locked itself into in the late 1990s. That path is characterized by rising trade deficits, weakened manufacturing investment spending, and loss of manufacturing jobs.
The yuan’s under-valuation stands to lower European exports and increase imports from China as spending is redirected from European produced goods to cheaper Chinese goods. The resulting increased trade deficit will directly cost jobs, and reduced demand and profitability of European manufacturing companies will reduce investment spending. Furthermore, European manufacturers will have an incentive to close plants and shift production and new investment to China, just as happened in the US.
Expansionary monetary policy has been employed to help mitigate the impact of the global financial crisis and is starting to be reflected in the financial sector’s lending rates.
Qu Hongbin, an economist at HSBC, predicts that by 2012 nearly $2 trillion of annual trade (over 40% of China’s total) could be settled in yuan, making it one of the top three currencies in global trade. Others reckon this is too optimistic. Although Chinese firms are keen to invoice in yuan, trading partners will be more reluctant. There is no real forward market for the yuan, making it hard to hedge risk, and it is not accepted by most other countries.
An opportunity for Thai banks ?
China has granted Bangkok Bank PCL, Thailand’s largest commercial bank, an exclusive license to clear yuan transactions in the country, media reports said Wednesday.
The move was part of China’s attempt to expand the role of its renminbi currency in Asia, Bangkok Bank senior executive vice president Prasong Uthaisangchai told The Nation newspaper.
‘Hong Kong will become the first yuan-clearing centre for China,’ Prasong said. ‘There are now several banks in Hong Kong that serve in this capacity, but in general, I think China wants to have only one bank in one market.’
So far, the Thai government has enough capacity to finance the first economic stimulus package and the three-year public investment plan. In the face of shrinking revenues, the government estimates its budget deficit to be about 525 billion baht, or 6 percent of Thailand’s gross domestic product, in the fiscal year ending September 2009. It is also seeking loans from domestic and external sources to shore up the budget and support planned investment.
However, the World Bank cautioned that, for public debt to remain manageable, budget deficits will need to be reduced over the next few years and growth needs to return its long-term average, highlighting the importance of using the crisis as an opportunity to enhance growth prospects.
International reserves stood at US$106 billion in early December 2008 compared to US$87.5 billion at end-2007. This is due to the large capital inflows in the first quarter of the year and again in the last quarter of the year. External debt is low at around US$66 billion or 30 percent of GDP, of which two-fifths are short-term debt.Three quarters of the short term debt are trade credits and inter-company loans. Public external debt (government and state-owned enterprises) make up one-fifth of total external debt and less than 1 percent of it is short-term. Overall, external debt service ratios are manageable at 6.1 percent of exports.