China's premier says further yuan rise unlikely

March 14, 2012 - 7:25 AM
China Politics

Chinese Premier Wen Jiabao gestures during a press conference after the closing session of the annual National People's Congress held in Beijing's Great Hall of the People, in China, Wednesday, March 14, 2012. Wen, entering his final year as China's premier, called Wednesday for vague political reforms to forestall chaos and solidify growth as the nation's legislature approved a budget aiming to boost domestic consumption in the face of weak demand for exports. (AP Photo/Alexander F. Yuan)

BEIJING (AP) — China's premier suggested Wednesday the rise of the yuan against the dollar has ended, possibly fueling tensions with the U.S. amid complaints the tightly controlled currency is undervalued and distorts trade.

Frictions over China's currency are acute at a time when governments are trying to boost exports and avert a new global slowdown. Washington and other nations complain an undervalued yuan gives China's exporters an unfair price advantage and wipes out jobs abroad.

Premier Wen Jiabao, speaking at a wide-ranging, three-hour news conference at the end of China's legislative session, said the yuan has gained 30 percent in real terms since 2005 and has moved up and down since September in Hong Kong trading of nondeliverable forward contracts. Such contracts track the movement of currencies that are not freely traded, and are settled in dollars or other hard currencies.

"That shows that the renminbi exchange rate may possibly have reached an equilibrium exchange rate," said Wen, the country's top economic official.

Wen pledged to create a more flexible, market-based exchange rate system.

"We welcome greater elasticity of the renminbi exchange rate," he said.

Wen's comments are likely to frustrate critics including American lawmakers who are pressing for higher tariffs on Chinese goods.

China's normally huge trade surplus plunged to a rare $31.5 billion deficit in February. Some commentators took it as a sign the yuan has reached a fair exchange rate. But others said it was a one-time event, noting China often has a trade deficit early each year as factories restock after the Lunar New Year holiday.

On Tuesday, the United States, the European Union and Japan opened a new front in trade disputes with Beijing when they filed complaints with the World Trade Organization challenging its controls on rare earths mining and exports. U.S. President Barack Obama accused Beijing, a WTO member, of going against free-trade rules it promised to follow.

Wen did not mention that case at Wednesday's news conference but appealed for closer cooperation with Washington to resolve "difficulties and frictions." He gave no indication of possible concessions on complaints about market barriers and other disputes.

Wen called for U.S.-Chinese collaboration in clean energy, environmental protection, aviation and other technology fields.

The premier also said China plans to invest in U.S. infrastructure — a possibility first raised in November by the chairman of Beijing's sovereign wealth fund. Wen gave no timetable or possible targets for investment.

"China will make investment in infrastructure construction in the United States, and that will help contribute to the generation of local jobs," Wen said.

Turning to the domestic economy, Wen announced no new reforms but promised more steps to achieve previously announced goals of making China's economy cleaner and more efficient after three decades of rapid growth driven by low-cost labor.

Growth slowed to a still-robust 8.9 percent in the final quarter of 2011 after Beijing clamped down on credit and investment to steer the expansion to a more sustainable level from 2010's double-digit rate. The government lowered its growth target this year to 7.5 percent from the 8 percent level in place since 2005.

"We hope China's growth will no longer come at the cost of resource consumption and environmental pollution," the premier said in nationally televised comments.

The World Bank and Beijing's own researchers say the economy requires sweeping change to curtail the dominance of state companies and promote consumer spending to reduce reliance on exports. They say that if leaders fail to act, they might see growth stall, trapping China's people at middle income levels.

Leaders appear to be postponing basic changes until a once-a-decade leadership succession is completed this year — a delay some analysts say might increase the cost and difficulty of rebalancing the economy.

Wen said lending and construction curbs that have started to cool surging housing prices will remain in place despite complaints they might worsen an economic slowdown. Construction and real estate sales are key drivers of China's growth.

The housing price surge was driven in part by the flood of stimulus spending and bank lending after the 2008 global crisis. Prices eased slightly in the second half of 2011 but are well above levels of recent years.

"Home prices in China are far from coming back to a reasonable level, so we must not slacken our efforts in regulation of the housing sector," Wen said. "Otherwise, past gains will be lost and there will be chaos in the housing sector."