One of the topics dominating Chinese President Hu Jintao's state visit to Washington is the yuan. The U.S. feels that China, by loosely pegging the yuan to the dollar, has kept its currency deliberately weak to promote exports, often at the expense of workers in America who cannot compete against the cheap wages of their Chinese counterparts. The yuan has strengthened just 3.5 percent over the last 12 months against the dollar. In contrast, the Japanese yen has appreciated 10 percent.
Hu's government, though, faces strong lobbying of its own from the chief executive officers of major Chinese corporations. The Chinese C-suite opposes a rapid appreciation of the yuan and criticizes the U.S. for weakening the dollar and letting ultra-loose credit conditions fuel asset bubbles in emerging markets.
Shen Wenrong, chairman of Jiangsu Shagang Group, the nation's biggest private steelmaker, says China should allow only a "token" appreciation while the U.S. is "printing money to stoke inflation." Ma Weihua, CEO of China Merchants Bank (CIHKY), says the yuan shouldn't climb too quickly. He thinks the Federal Reserve must show more restraint after planning to buy $600 billion of Treasuries from U.S. banks, which will give them plenty of money to lend—money that could end up feeding a bubble in China.
Shift in Attitude
This stance differs from remarks made by some Chinese CEOs in March, when Chinese executives focused on the domestic market backed an end to the yuan-dollar peg. The argument was that a stronger currency would lower import costs and boost consumer purchasing power. Since March, though, the Chinese central bank has raised rates twice and told China's banks to boost reserves. In this context, a hefty appreciation of the yuan may cool things down too much.
Ma of China Merchants, the nation's sixth-largest lender by market value, also asks why Hu should be in any hurry to help the U.S. "We hope the yuan will get stronger but don't want the appreciation pace to be too fast," says Ma. "The U.S. isn't taking responsibility. It called on China to adjust its yuan policy, but the whole world is suffering from its easing measures."
Shen of steelmaker Jiangsu Shagang says the government has to balance the competitiveness of China's exports against the need to cut raw-material costs. "As a big buyer of iron ore, China benefits from appreciation," says Shen. "But the benefits are limited."
One way or another, "Chinese companies have to face the reality of a rising yuan as the economy grows fast and foreign-exchange reserves increase," Zhang Wei, deputy director of the state-run China Chamber of International Commerce, told reporters in mid-December. "They should also get fully prepared for rising international pressure on China to let the yuan appreciate."
The bottom line: Chinese CEOs want the government to tread cautiously when it comes to letting the yuan appreciate.