China Tells EU to Back Off After Push for Rapid Yuan Gain

China stiffened its opposition to a rapid appreciation of the yuan, setting the stage for a confrontation over exchange rates at this week’s international monetary meetings in Washington.

Premier Wen Jiabao said China will stick to its policy of gradually increasing the currency’s flexibility and lashed out at European Union leaders for teaming with the U.S. to pressure the Chinese government.

“Europe shouldn’t join the choir” clamoring for a higher yuan, Wen told a business conference yesterday before an EU- China summit in Brussels. “If the yuan isn’t stable, it will bring disaster to China and the world. If we increase the yuan by 20-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil.”

China has capped the yuan’s rise at 2 percent since relaxing a dollar peg in June, leading to criticism that it is stunting the recovery in the industrial world by shielding its market from U.S. and European imports.

International exchange-rate diplomacy shifts into high gear at the Oct. 8 Group of Seven meeting in Washington after China rebuffed EU and U.S. pleas, the Bank of Japan sought to drive down the yen by unexpectedly easing monetary policy, and Brazilian Finance Minister Guido Mantega warned of a global “currency war.”

Photographer: Jock Fistick/Bloomberg

Wen Jiabao, China's premier, listens during the EU-China summit at the European Commission headquarters, in Brussels. Close

Wen Jiabao, China's premier, listens during the EU-China summit at the European... Read More

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Photographer: Jock Fistick/Bloomberg

Wen Jiabao, China's premier, listens during the EU-China summit at the European Commission headquarters, in Brussels.

‘Brinksmanship’ Game

“There’s a game of brinksmanship being played,” David Cohen, an economist at Action Economics in Singapore, said in a Bloomberg Television interview. “I suspect at the end of the day the Chinese will agree to return to gradual appreciation of their currency.”

Non-deliverable forwards indicate the yuan will rise 3.3 percent to 6.4799 per dollar in a year, the most projected by the contracts since April. The currency traded at 6.6912 in Shanghai Sept. 30 before China’s markets closed for a holiday.

The 16-nation euro region’s trade deficit with China widened 6.7 percent to 48.1 billion euros ($67 billion) in the first half of 2010. The U.S. deficit with China widened 16 percent to $119 billion.

Noting that Europe’s exports to China still rose more than 40 percent in the first half, Wen rejected a call by European Commission President Jose Barroso for an “orderly and broad- based appreciation” of the yuan.

Event Canceled

“If China’s economy goes down, it’s not good for the world economy,” Wen said. Time constraints were given as the reason for cancelling a post-summit press conference with Barroso and EU President Herman Van Rompuy.

China’s currency policy wasn’t mentioned in a joint communiqué issued after the summit. In the 11-paragraph statement, the two sides called for “further concerted efforts” toward “sound fiscal policies that would guarantee the sustainability of public finances while being growth- friendly.”

U.S. impatience with China boiled over on Sept. 29 when the House of Representatives passed a measure that would let American companies seek import duties to prevent Chinese manufacturers from using an artificially weak yuan as a competitive tool. The measure won’t go to the Senate until after U.S. congressional elections in November.

Euro’s Climb

The euro has risen 16 percent against the dollar, 14 percent against the yuan, 6 percent against the Japanese yen and 6 percent against the British pound in the past four months. The four countries bought a third of the euro region’s 1.3 trillion euros in exports last year.

China’s nudge to the yuan since June has been “not exactly what we would have hoped ourselves,” European Central Bank President Jean-Claude Trichet said this week.

European growth probably eased from a four-year high of 1 percent in the second quarter to 0.4 percent in the third quarter and will slip to 0.3 percent in the fourth, the Munich- based Ifo institute, Rome-based Isae and Insee in Paris said yesterday in a joint forecast. The European statistics office cut its estimate of second-quarter consumer spending growth to 0.2 percent from 0.5 percent, indicating the region’s reliance on exports.

“If the euro continues to bear a disproportionate burden in the adjustment of global exchange rates, the recovery of the euro area’s economy might be weakened,” EU Economic and Monetary Commissioner Olli Rehn said on Oct. 5.

China’s economy will grow 10.5 percent in 2010 and 9.6 percent next year, beating rates of 1.7 percent and 1.5 percent for the euro region, the International Monetary Fund said yesterday.

To contact the reporters on this story: Zijing Wu in Brussels at zwu17@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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