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China Takes Broad Approach to Reform

The Chinese government and textile industry associations have refrained from directly addressing concerns in the U.S. Congress over key trade issues like...

Appeared In
Special Issue
WWD Sourcing Horizons issue 03/18/2008

BEIJING — The Chinese government and textile industry associations have refrained from directly addressing concerns in the U.S. Congress over key trade issues like currency reform and alleged textile trade subsidies.

Instead, top leaders spoke in recent weeks of broad policy measures to further open China’s domestic consumer market, continue with currency reform at their own pace and abide by fair trade rules as part of the World Trade Organization.

When asked recently for a response to charges last fall from the U.S.-based National Council of Textile Organizations over what it deemed more than 70 cases of trade subsidies on textiles, the Ministry of Commerce said it had no official policy statement on the matter. Meanwhile, top Chinese industry groups said they were working on the issue but were not authorized by the Commerce Ministry to comment about it.

In his annual speech to the National People’s Congress on March 5, Premier Wen Jiabao spoke broadly to the issue of U.S.-China trade tensions, calling for concerted efforts to balance the economy, reduce China’s trade surplus and deepen currency reform.

The premier argued that China has changed dramatically since entering the WTO in 2001 and has “honored all the commitments we made when we entered.”

“We deepened reform of the externally oriented economic system to facilitate trade and investment,” Wen said. “We lifted controls over access to foreign trade, greatly lowered tariffs, rescinded non-tariff measures such as import quotas and permits, and opened banking, commerce, telecommunications and other service sectors wider.”

Meanwhile, he said, “Trade protectionism has gotten worse and trade frictions have increased.”

Those worsening tensions, coupled with a global economic slowdown, could spell problems for China’s economy, Wen said, and the central government will be cautious to that end in 2008.

While its trading partners are mainly concerned with fair trade issues, China’s top leaders made it clear in their recent public speeches during the annual congress that a domestic issue, rising inflation, is their top priority. The Consumer Price Index rose 4.8 percent last year, which is where officials have vowed to keep it in 2008.

Curbing inflation plays into international demands on China, as the governor of the Chinese central bank acknowledged that leaders consider the value of the currency one tool in their arsenal against consumer inflation.

Even with its pledges to allow a further rise of the currency, the Chinese government will not reveal a firm timetable and gives the impression that it still has no plans to bend to international pressure on the issue. The U.S. has been pushing China for several years for a faster currency reform timetable, to which China has responded that it will maintain its own pace in line with not disrupting the domestic economy.

The government relaxed its decade-long peg to the dollar in July 2005, instead tacking the value of its currency to a basket of international currencies floating within a limited trading band. Since then, the yuan’s value has risen slowly and steadily, from its starting point of 8.2 per dollar to its current rate of about 7.1 per dollar. The yuan rose in value by 6.9 percent in 2007, with faster gains at the end of the year sparking speculation that currency appreciation was being used to fight fast-rising consumer inflation.

Zhou Xiaochuan, governor of the People’s Bank of China, said March 6 that although currency is one tool in the government’s potential arsenal against rising prices, it is not the only device. Zhou said interest rates will play a larger role as the central government works to keep inflation this year at or below the 2007 level of 4.8 percent.

Other tools will include subsidies, increasing supplies and monitoring markets to reduce price fixing and hoarding. China’s inflation reached an 11-year high of 7.1 percent in January, further sparking concerns of social instability in a country where the government’s primary claim to legitimacy among its citizens is growing economic prosperity.

“We don’t have to use the exchange rate to curb inflation, but it does play a role to some extent,” Zhou said during a news conference at the annual meeting of the National People’s Congress.

Analysts like Hong Liang, chief China economist for Goldman Sachs, have predicted a speedier rise of the yuan this year. In a research note in February, Hong said the currency will rise by 12 percent in 2008, nearly double the pace of appreciation last year.

Economic leaders like Zhou have refused to give predictions or timetables on the yuan. Instead, they have repeated their oft-heard mantra of maintaining economic stability through cautious adjustments as warranted.