/www.bloomberg.com/ By Mayumi Otsuma
Paris, Feb. 23 (Bloomberg) -- Japan wants China to drop its currency peg to the dollar, Finance Minister Masajuro Shiokawa told the world's richest nations, a step that may strengthen the yuan and make goods from Japan more competitive.
``Countries which are pushing for trade liberalization should simultaneously push for the liberalization of finances and currency systems -- particularly member nations of the World Trade Organization,'' Shiokawa said yesterday at a press conference following a meeting of finance ministers and central bank governors of the Group of Seven major industrialized nations.
Japanese government officials have said the world's most populous nation should end pegging its currency to the dollar. The yuan would appreciate if the currency were allowed to trade freely because of China's rising foreign-exchange reserves and incoming foreign investment, economists said. China joined the WTO in 2001.
``Japan's argument is that China has become an exporting tidal wave,'' said Kenneth Courtis, Goldman Sachs Group Inc.'s vice chairman for Asia. As to whether China is likely to heed Japan's call, ``the quick answer is one word: no.''
Since China pegged the yuan at 8.3 to the dollar in 1994 cheap exports have fueled a $199 billion trade surplus and low manufacturing costs have attracted $308 billion in foreign investment. An 11 percent fall in the yuan against the yen last year made China's products more competitive against those from its second-biggest trading partner.
Exporting Deflation
Haruhiko Kuroda, a former Japanese vice finance minister for international affairs, said in an essay published in the Financial Times in December that China ``is exporting deflation'' to the rest of the world and should allow its currency to reflect the economy's strength. Japan's consumer prices haven't risen since April 1998 partly because imports from China and other emerging economies forces Japanese manufacturers to cut prices.
China last month posted its first trade deficit in more than six years. January's deficit was $1.25 billion, the first time the nation has posted a shortfall since December 1996. Imports rose 63 percent to $31 billion, while exports rose 37 percent to $29.8 billion.
Japan's argument ``that China is exporting its way to health doesn't make sense when you look at the numbers,'' Goldman Sachs' Courtis said.
Nevertheless, Goldman Sachs estimates the yuan is undervalued by 15 percent and expects China to expand the yuan's trading range within the next 12 to 18 months, initially moving to a 1 percent band from the current 0.2 percent.
Chinese Finance Minister Xiang Huaicheng said in November he ``personally feels some pressure, and this is something the U.S. is pondering.'' The U.S. trade deficit with China rose 24 percent last year to a record $103 billion.
`Steady'
``China is unlikely to drop the peg without loosening capital controls,'' said Cheng Manjiang, an economist at BOCI Asia Ltd., the investment banking unit of the Bank of China. ``From a long- term perspective, China will keep the yuan rate steady and won't let it strengthen, although the country may allow the trading band to widen a bit.''
Japan's proposal on China's currency was greeted with a degree of acceptance at by its G-7 counterparts, Shiokawa said yesterday. ``It generated vigorous discussion at the meeting,'' he said. ``There were voices calling for such a revision.''
China's policy makers suggested they have no plans to shake up the currency system. Asia's fastest-growing economy ``will continue to support the current exchange-rate system and keep a stable yuan,'' People's Bank of China Governor Zhou Xiaochuan said in a statement on the bank's Web site on Jan. 27. Central bank spokesman Wei Gejun was unavailable for comment today.
``China has to make sure that the pace of economic growth remains as rapid as possible and revaluing the currency does not fit well with that dominant objective,'' said David Simmonds, senior emerging markets strategist at Royal Bank of Scotland Plc in Singapore. ``The most important priority for China is growth, the second most important is growth and the third most important is growth.''
China grew 8 percent last year.