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Monday 30 May 2016

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China rules out weakening yuan to boost trade

Published 26/02/2016

China faces pressure to reassure world markets over how it is steering its slowing economy and managing its currency (AP)
China faces pressure to reassure world markets over how it is steering its slowing economy and managing its currency (AP)

China's central bank chief has promised to avoid weakening its yuan to boost sagging exports as he tries to reassure nervous world markets about his government's handling of its economy and currency at the start of a closely-watched gathering of global finance leaders.

Beijing wanted to use the gathering of finance ministers and central bankers from the Group of 20 rich and developing countries to promote its campaign for a bigger voice in managing global trade and finance.

Instead, the communist government is scrambling to defend its reputation for economic competence following stock market and currency turmoil.

A key worry, despite repeated Chinese denials, is that Beijing will allow its yuan to decline in value to support struggling exporters. That expectation has driven an outflow of capital from China that spiked to a record £96.4 billion in December.

"We will not resort to competitive depreciation to boost our advantage in exports," said Zhou Xiaochuan, governor of the People's Bank of China.

Mr Zhou said the meeting of finance officials from the United States, Japan, Europe and other major economies should focus on managing lacklustre global demand, structural economic reforms and promoting "sustainable and balanced" growth.

Others attending the meeting include US Treasury secretary Jacob Lew and Federal Reserve chairwoman Janet Yellen, China's finance minister Lou Jiwei and their counterparts from Germany, Britain, Japan, South Korea, India and South Africa.

Global growth has slowed to its lowest rate in two years and private sector forecasters say the danger of a worldwide recession is rising. The International Monetary Fund cut its forecast for this year's global growth by 0.2 percentage points last month to 3.4%. It said another downgrade was likely in its April update.

Japanese and Eurozone officials have called for co-ordinated global action but have yet to say what they might propose at the Shanghai meeting.

The foreign view of China's economic health was shaken last year by a stock market collapse that wiped out £3.5 trillion in paper wealth. On Thursday, its main market index fell by an unusually large daily margin of 6.4%. Last year's exports fell 2.8% from 2014, well below the official target of 6% growth in total trade.

The ruling Communist Party is in the midst of a marathon reform plan aimed at transforming China into a consumer-led economy and reducing reliance on trade and investment.

In separate comments at the G20 opening ceremony, Mr Zhou tried to reassure his audience the Chinese economy was healthy after growth slowed to a 25-year low of 7.3% last year. He noted that it still was among the world's strongest performances.

"China's economic fundamentals remain strong and supportive of growth," he said. "The Chinese economy will continue to grow at a moderate-to-high pace."

Economists complain the secretive Chinese government has fuelled market volatility by failing to communicate policy changes clearly.

In a report ahead of the Shanghai meeting, the IMF urged G20 leaders to support China's economic reforms but also called on Beijing to "ensure clear communication of their exchange rate policies".

Other governments are trying to douse expectations the Shanghai meeting will produce specific growth plans similar to those rolled out in 2009 in response to the global crisis.

Germany's finance minister Wolfgang Schauble said his government would not agree to a co-ordinated fiscal stimulus package in the event of further deterioration in the global economy.

He urged other countries to deliver on promises of pro-growth structural reforms instead of relying on monetary and fiscal policy to boost growth.

"The debt finance growth model has reached its limit," Mr Schauble told an event organised by the Washington-based Institute of International Finance alongside the Shanghai meeting. "We do not agree on a G20 fiscal stimulus package."

IMF managing director Christine Lagarde, who was attending the Shanghai meeting, urged policymakers to speed up the pace of reforms.

"We think they should go bold, they should go broad and they should go together," she said.

Referring to monetary and fiscal policy and structural reforms, she said: "There has to be action on all fronts."

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