Sept. 17 (Bloomberg) -- European Central Bank council member Ernst Welteke said China shouldn't make ``abrupt'' changes to its decade-old dollar peg as the country's banks aren't equipped to cope with currency fluctuations. ``It makes no sense to pressure the Chinese government because China must first develop its banking system,'' Welteke said in a televised interview with Bloomberg News in Frankfurt. ``One has to be careful to avoid abrupt changes.'' Welteke's remarks are the latest setback to efforts by U.S. Treasury Secretary John Snow to persuade China and other Asian countries to let their currencies float. Japanese Prime Minister Junichiro Koizumi on Tuesday signaled he won't support Snow, who has said he will request the support of his counterparts in the Group of Seven nations at a meeting Saturday in Dubai. Snow and U.S. President George W. Bush, who is seeking re- election next year, are under pressure to take action from companies including General Electric Co. and Nucor Corp., who blame an artificially weak yuan for a record trade deficit with China and job losses. The U.S. economy has shed 2.7 million jobs since Bush took office in January 2001.
``There's a lot of speculation that there will be an imminent policy change around the time of G-7 this weekend, but it's way too early,'' said Clifford Tan, a Singapore-based director of Asian economics at Citigroup Inc., the second-largest trader in the yuan market according to Euromoney magazine. China's 12-month forward contract, which traders can use to place bets on the yuan because it is freely traded, fell to 1,990 at 1:12 p.m. in Hong Kong, after rising to a record 2,075, from 2,060 yesterday, according to Bloomberg data. The rate implies the yuan, valued at around 8.3 per dollar since 1995, would strengthen to 8.078 per dollar in a year's time if not pegged, from as high as 8.0695.
`Up to China'
``The issue of China's yuan should be up to China,'' Koizumi told reporters in Tokyo. ``It's not an issue which Japan will pursue.'' In Washington, a group of U.S. representatives will introduce a bill urging the Bush administration to ``use all available means'' to compel China to stop manipulating its currency to boost exports, said Rich Carter, a spokesman for Representative Donald Manzullo, an Illinois Republican and co-sponsor of the resolution. The House resolution also calls for trade sanctions against Japan, South Korea and Taiwan. A trade resolution by Congress would strengthen U.S. negotiations and may herald tariffs or sanctions, said Mickey Kantor, who served as Commerce secretary and top trade representative in the Clinton administration. ``There will be other things suggested by Congress -- raising tariffs, invoking trade laws or going to the World Trade Organization,'' Kantor said. ``We should be fairly blunt, resolute and focused with China to get them to trade in a way that is helpful to everyone, including themselves.''
Yuan Peg
China has fixed the yuan at about 8.3 per dollar since 1995, spurring exports and attracting criticism from many of its trading partners. European policy makers said last week they will use the Dubai meeting to urge Asian countries to reduce exchange-rate ``imbalances.'' ``We've decided to take measures, but we've not yet decided on the content of those measures,'' Italian Finance Minister Giulio Tremonti, who will speak for the euro countries at the Group of Seven gathering, said after meeting with European finance ministers on Friday. The euro's 15 percent increase against the U.S. currency in the past year has hampered European exports and contributed to the slide in economic growth to a 10-year low. The International Monetary Fund yesterday halved its growth forecast for the region to 0.5 percent this year and urged ``a more balanced adjustment of exchange rates around the world.''
Investors' Gain
The 12-nation euro region's trade deficit with China widened to 15.3 billion euros ($17 billion) in the first five months from 13.2 billion euros a year ago. The deficit with Japan widened to 9.6 billion euros from 9 billion euros. While Welteke agreed that the currency policies of some Asian countries hurt European exporters, he said companies that have invested in countries like China are profiting from the currency peg. The U.S. ``are the ones with the highest current account deficit,'' said Christoph Hausen, an economist at Gothaer Asset Management AG in Frankfurt, which oversees the equivalent of $18 billion. ``Europe is principally on the U.S.'s side, but they keep a lower profile about the matter.'' The U.S. trade deficit widened in July as imports rose to the second highest on record, led by oil and consumer goods such as games and clothing. A group of U.S. senators last week said they would introduce legislation to impose tariffs on Chinese imports unless China floats its currency.
Export Demand
Countries including the Philippines, South Korea and Taiwan, whose exports to China would suffer from a slowing Chinese economy, have rejected the U.S. appeal to realign their currencies. Standard & Poor's said on Monday scrapping the yuan's dollar peg would be ``dangerous'' and jeopardize the country's credit rating. ``Lifting of exchange controls at the moment could be risky because Chinese banks are ill-equipped to handle volatility in the exchange rate,'' Singapore-based S&P analyst Ping Chew said in a report. S&P rates China's long-term foreign currency debt at BBB, the ninth level on its 10-step investment-grade rating scale. The cap on the yuan makes Chinese goods cheaper abroad, increasing demand for its exports, which account for about a third of gross domestic product. The peg has also helped to attract $308 billion in foreign direct investment. China, the world's fastest-growing major economy, says it needs to grow at least 7 percent annually to generate enough jobs for the 20 million people who enter the labor force every year. //www.bloomberg.com