Chinese official warns of risk if yuan rises

A senior Chinese trade official warned that any further appreciation of the Chinese currency risked driving exporters out of business, underscoring the domestic political pressures on Beijing amid growing international calls for China to let the yuan rise.

Vice Commerce Minister Zhong Shan, in an exclusive interview Thursday ahead of a visit to the U.S., said that the profit margin on many Chinese export goods was less than 2%.

Most exporters absorbed the appreciation in the value of the yuan that followed its revaluation in 2005 by boosting innovation and cutting costs, but many were forced to close, he said. A further rise in the currency's value would endanger more exporters' survival, which China can't afford, he said.

Mr. Zhong talked about a potential tipping-point effect to describe the fragile situation of many exporters. "Water doesn't boil if it is heated to 99 degree Celsius. But it will boil if it is heated by one more degree," he said. Likewise, "a further rise in the yuan by a very small magnitude might cause fundamental changes" to exporters in China, he said.

The yuan climbed 21% against the dollar from 2005 to 2008, when China adopted a managed-float currency system under which the yuan's value was linked to a basket of currencies. But the yuan has been kept almost unchanged against the dollar since the outbreak of the global crisis to help Chinese exporters, which has prompted much criticism from abroad.

Earlier in the week, a bipartisan group of U.S. senators introduced legislation aimed at forcing the Obama administration to take action against China over its currency policy, reflecting growing anger on Capitol Hill over the issue. On Thursday, U.S. Ambassador to China Jon Huntsman, in a speech to students at Tsinghua University in Beijing, called on China to allow "more flexibility" on the yuan exchange rate.

Mr. Zhong said that "I fully understand the state of mind of the U.S. government and its people" toward the problem of high unemployment. He pointed out, however, that while the U.S. has a jobless rate of more than 9%, compared with China's urban jobless rate of slightly more than 4%, the absolute number of China's jobless is far higher because of its much larger population. China makes no secret of the fact that its currency policy is designed partly to protect jobs in the export sector and thus maintain social stability.

Within Beijing's government bureaucracy, the thinking on exchange rates isn't monolithic. The Chinese Commerce Ministry is under particular pressure from the exporter lobby to defend their interests, and Mr. Zhong's comments reflect that political reality. Labor-intensive exporters have the most to lose from currency appreciation, which erodes their competitiveness.

Mr. Zhong said China is willing to purchase more American goods and take other steps to reduce its trade surplus with the U.S.

But he urged the U.S. to find a solution at home rather than put pressure on China. He noted that China found ways to cope when tens of millions of workers were thrown into unemployment in the late 1990s when the government shuttered unprofitable state-run enterprises. "When we have a problem, we usually look for the causes internally. However, the U.S. tends to look for reasons from the outside. There's a cultural difference between our two nations," Mr. Zhong said.

As an example of these differences, he said that more than a decade ago when he was chairman of a Chinese textile trading company he noticed that when U.S. business executives visited China "they said they must fly first class and stay at five-star hotels." He claimed he never awarded himself such luxuries. "I wanted to save costs and ease pressures within the company starting from the position of chairman," he said.

Mr. Zhong warned that a rise in the value of China's export products could also accelerate inflation in the U.S. and the rest of the world.

However, he carefully avoided saying that China would keep the currency regime entirely unchanged. "We are willing to have discussions with the U.S. on the currency issue. There's nothing that can't be discussed between China and the U.S. But if you pressure us to do something, that's not in line with China's culture," Mr. Zhong said.

Premier Wen Jiabao, at a news conference on Sunday, argued that the yuan isn't undervalued.

Mr. Zhong is scheduled to leave Saturday for the U.S., where he will meet U.S. representatives including congressmen to seek ways to improve the bilateral trade relationship amid rising political and economic tensions.

Earlier this week, Commerce Ministry's spokesman Yao Jian said the ministry has been examining the potential impact of a change in the yuan's value on exporters. Domestic media have reported other ministries are conducting similar investigations, dubbed "stress tests." However, economists say this shouldn't be interpreted as a sign Beijing is laying the groundwork for a rapid rise in the yuan in coming months, and some said China could in fact use the studies to argue against an appreciation of the currency.

Asked about a growing concern among many multinational companies about a worsening business environment in China, Mr. Zhong said China remains one of the most attractive destinations in the world for foreign investment and is determined to open its market further.