China/RMB: Patience and Stbility

UNCLAS SECTION 01 OF 02 BEIJING 000311 SIPDIS SENSITIVE STATE FOR E, EAP/CM, EEB/OMA TREASURY FOR OASIA/DOHNER, WINSHIP NSC FOR LOI E.O. 12958: N/A TAGS: ECON EINV EFIN CH SUBJECT: China/RMB: Patience and Stbility REF: BEIJING 147 ¶1. (SBU) Summary. Senior Chinese officials continue to signal publicly that China's currency is pegged at a basically "reasonable level." In a meeting with the Ambassador today, Central Economic and Financial Leading Group Vice Minister Liu He urged patience on the exchange rate issue, noted that the Renminbi "had to" appreciate, but at a "controlled pace," but added that outside pressure was "not helpful." Earlier in the week in Davos, Senior Vice Premier Li Keqiang argued that the stable Renminbi, by supporting Chinese demand, had in turn supported global recovery and called the exchange rate "reasonable and balanced," a position reiterated by the Ministry of Foreign Affairs (MFA) spokesperson a few days later. A People's Bank of China (PBOC) Deputy Governor, also in Davos, explained that China would look at revaluing its currency when global partners begin to withdraw their stimulus packages. A forceful lead article today in the English-language China Daily asserted that China would not "fold" to foreign pressure on the currency issue, but a quasi-official economist published an article speculating that China could appreciate the Renminbi in March. End Summary. Liu He: Patience -------------- ¶2. (SBU) Central Economic and Financial Leading Group Vice Minister Liu He told the Ambassador today that dealing with the Renminbi would be as tough as any issue on the bilateral agenda. He said he understood that the United States had upcoming elections, high unemployment and monetary pressure to manage. China, however, could not forgo exports too quickly and also was worried about employment, making currency a POLITICAL issue for Beijing as well. For economic reasons, Liu stated that the Renminbi "had to" appreciate, but at a "controlled pace." Outside pressure was not helpful; Liu recommended the Secretary Geithner maintain his current approach to the issue. He asked for patience on the U.S. side while China awaited an opportune time to proceed, suggesting that the U.S. and China look for other opportunities to demonstrate that the relationship could create jobs in America and investment returns for China. Li Keqiang: Stable RMB "Positive" -------------- ¶3. (SBU) Vice Premier Li Keqiang did not address the sensitive issue of exchange rates directly during his January 28 speech at the World Economic Forum in Davos, Switzerland. During a discussion with corporate executives, however, Li asserted that China will maintain the exchange rate at its current level. Restating the standard Chinese points, Li said "China is consistent and responsible with its RMB exchange rate policy. We will--according to the principles of pro-activity, controllability and incrementality--perfect the RMB exchange rate formation mechanism to maintain it at a reasonable and balanced level." Li asserted that China's policy of stabilizing the Renminbi at a "rational and balanced level" contributed positively to the global economy. He explained that China's economic and financial stability could not be separated from RMB stability, and Chinese domestic demand played a positive role in global economic stabilization and recovery. Li's points were echoed in a February 23 editorial in the official Chinese-language Renmin Ribao (People's Daily) asserting that China's Renminbi policy had helped the global economy and the call for appreciating was merely a "political bargaining chip." Zhu Min: When Others Exit -------------- ¶4. (SBU) Also at Davos, People's Bank of China (PBOC) Deputy Governor Zhu Min said the stable exchange rate had been "a stimulus package" and China would look at revaluing its currency when BEIJING 00000311 002 OF 002 global partners begin to withdraw their stimulus packages. Sounding a similar note to Li, Zhu said the move was "good for China and also good for the world." "If global (partners are) ready to do exit strategy, China is ready ... including various issues -- liquidity issue, exchange issue." He further warned that revaluation of the Renminbi would not in itself resolve global trade imbalances, stating "exchange rate is an issue within this rebalancing issue." MFA: Reasonable Level -------------- ¶5. (SBU) Chinese Foreign Ministry spokesman Ma Zhaoxu---responding on February 4 to a question from the media about President Obama's comments to Senate Democrats-reiterated that Chinese point that exchange controls are not to blame for China's trade surplus. He stated that "China does not seek a trade surplus with the US" and the Renminbi's exchange rate against the dollar was largely at a reasonable level. Accusations and pressure did not help to solve the problem, Mr. Ma added. China Daily: China Won't Fold -------------- ¶6. (SBU) The official English-language China Daily ran a front page, above-the-fold article headlined "China Won't Fold on RMB: hasty appreciation of the yuan will be detrimental to China's economy." The article quoted Ministry of Commerce-affiliated economist Li Jian stating "China will not (appreciate) in accordance with the US' demand." He claimed the yuan will be "largely" stable this year, without a sudden or quick revaluation. CASS Zhang Ming: Time to Appreciate Coming -------------- ¶7. (SBU) There are still dissenting voices on RMB appreciation within the official academic community in Beijing. China Academy of Social Sciences (CASS) World Economic and POLITICAL Research Institute vice director Zhang Ming wrote today in the Chinese- language "Hexun" financial news service that the timing for Renminbi appreciation might move up as China faces the possibility of overheating in the first quarter. Zhang thought the government might choose to address inflationary pressures by moving the exchange rate, bringing down the cost of imported commodities. To prevent anticipatory speculative inflows, Zhang guessed that Beijing might appreciate earlier than expected, around March National People's Congress meetings. HUNTSMAN