The Hindu Business Line : Easing yuan's peg to dollar

THE Europeans, like the Americans, are perplexed with the so-called "China factor" as that country continues to register record trade figures. Indications are that, by the end of this year, it is poised to overtake the US, the European Union's largest trade and investment partner, in its exports to the EU. The latest data from EUROSTAT (EU's statistical unit) highlight the competitive challenge faced by European companies from China, and all this has triggered tension, especially in the textiles sector.

EU imports from China, in the first four months of this year, were $54.4 billion, up 19 per cent over the corresponding previous period and current projections are that they may cross the $200-billion mark by end of the year.

On other hand, the EU's exports to China fell by one per cent, while the trade figures with the US remained static. It is, however, ironical that the current surge in China's export is not let by textile but by electrical and mechanical goods. Indications are that by the end of this year, China may emerge EU's largest trading partner, overtaking the US. Germany and the UK are two largest importers of Chinese goods and China is busy cultivating the markets of France, Italy and Benelux. The Chinese economy, now reflected in the fast rising GDP, is growing at a record 9.5 per cent despite attempts to slow it.

It is estimated that about 45 per cent of China's growth is derived from exports and it is often argued that its economic health is often vulnerable to pressures from the US and the EU.

The reality is that Chinese exports are fast becoming economic "growth engines" and to consolidate the country's grip, major companies plan to set up offices in European and American financial and trading capitals.

It is estimated that about 60 Chinese manufacturing, trading and investment companies will be set up in the EU. China has just made a bold bid to buy Britain's ailing auto manufacturing company, MG Rover. Tata Motors, according to an Indian observer, had earlier evinced interest in buying the British company, but the deal failed to materialise because of no serious backing or encouragement from the Government of India.China's export upsurge and the highest rate of economic growth, is sustained by the high level of investment in factories, power plants mines and other key sections of infrastructure such as national highways and ports.

It is also argued in the West that China has been able to maintain record high exports and economic growth because of the low value of its national currency vis-à-vis the dollar and the euro.

The Chinese observers ruled out any immediate prospects of revaluing the currency and European financial observers do not dispute this perception.

However, in a surprise move last Thursday, China's Finance Ministry stated that China would `ease' but not abandon yuan's traditional peg to the dollar. The yuan will float against a basket of currencies of countries with which China trades. In the financial market, the currency appreciated by two per cent vis-a-vis the dollar and, according to analysts, this will have little impact on China's massive trade surplus of $152 billion against the US.

Some Western politicians were canvassing for 10-20 per cent `appreciation' of the yuan vis-a-vis the dollar. However, the current strategy to ease yuan's firm peg to the dollar is seen as a "step in right direction".

Chinese steel exports grew 208 per cent in the first five months of this year and aluminium exports 64 per cent. Major European steel and aluminium manufacturing companies, on the other hand, are seeking new markets in the era of the so-called depressed economic growth. In the US, the CIA , using thePurchase Power Parity index, ranks the Chinese GDP as the second highest in the world.

However, there are many flaws in the Chinese economy. Its banking system is weak with mounting bad loans. The legal and accountancy systems are rated as being primitive .

European and American companies have made bold attempts to enter the Chinese market but have been hit both financially and even psychologically. There is a major debate over the economic and even political future of China, but many imponderables preclude conclusions either way.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Australia: Emerging hub for financial analytics off-shoring

To export or not?

How Indian Airlines can soar

The economics of crime

Easing yuan's peg to dollar — Gauging the China factor

The `peak oil' controversy

Ruling the mind-space

Veto power

World populations

Energy deal