China's Commerce Ministry on Monday rebuffed calls for the yuan to appreciate, signaling resistance to change in a controversial foreign exchange policy that loomed over U.S. President Barack Obama's first visit to the Asian giant.
Outside pressure has been building on Beijing to let the yuan rise after more than a year of it being nearly frozen in place against the dollar, with the latest appeal voiced by the head of the International Monetary Fund on Monday.
China's central bank last week tweaked its description of how it manages the currency, setting off a firestorm of speculation that it might be willing to give the yuan some room to run, though market expectations of appreciation have remained muted.
Any change in policy as important as exchange rate management will need to come from China's top leadership, bridging the views of different parts of the government. The commerce ministry made clear its position.
Either from the perspective of promoting stable global economic development, or from the perspective of promoting a recovery in Chinese exports, we must provide a stable and predictable environment for our enterprises, including macro-economic policy and currency policy, Yao Jian, a ministry spokesman, said on Monday.
Although China's economy has outperformed nearly all others in its recovery from the global financial crisis, many analysts believe that a sustained upturn in exports -- a core concern of the commerce ministry -- will be required for Beijing to let the yuan rise.
The comments by the commerce ministry's spokesman set the stage for tension with Obama, who arrived in Shanghai late on Sunday, ready to urge China to play its part in making global growth more balanced.
Getting China to spend more and save less is a principal ingredient of such change, because China's massive trade surplus with the United States stands as perhaps the most glaring of global economic imbalances and a major reason cited by Beijing's critics to explain why the yuan should be rising.
RELUCTANT ON YUAN
China has adopted a range of policies to stoke domestic demand, from ramping up its social security system to building more roads to its underserved interior, but its reluctance to move on the yuan remains a thorny issue.
IMF Managing Director Dominique Strauss-Kahn said on Monday that exchange rate appreciation is part of the reforms that Beijing needs to implement to increase domestic consumption.
A stronger currency is part of the package of necessary reforms, he said. Allowing the renminbi (yuan) and other Asian currencies to rise would help increase the purchasing power of households, raise the labor share of income, and provide the right incentives to reorient investment.
Market expectations of yuan appreciation picked up a touch after China's central bank said last Wednesday that it would consider major currencies, not just the dollar, in guiding the exchange rate.
In the same report, the People's Bank of China dropped its customary wording about keeping the yuan basically stable.
Nevertheless, investors are still betting on only moderate yuan appreciation.
The offshore non-deliverable forward market is pricing in a roughly 3.5 percent rise versus the dollar over the next 12 months, down from close to 3.8 percent implied appreciation on Friday.
To be sure, that would represent a departure from the virtual peg around 6.83 yuan per dollar that Beijing has kept in place since the financial crisis worsened in July last year.
But it would be a limited rise by even China's own standards, compared with the yuan's roughly 20 percent gain in the three years following its removal from a formal dollar peg in 2005.
Yao of the commerce ministry said that the yuan's exchange rate had only a small impact on China's trade surplus and, moreover, that it was unfair to blame global imbalances on Chinese exports.
If we only demand that one country appreciate its currency, but the dollars' value keeps going down, it is not conducive to the global economic recovery and it is also unfair, Yao said.
Many economists see China's trade surplus as a function of its cheap capital and over-investment, which generate excess production that is cleared through exports.
The implication is that deeper reforms to China's economy such as investing in public medical insurance, and not just yuan appreciation, are necessary to stimulate domestic demand and rein in its yawning trade surplus.
(Additional reporting by Caren Bohan and Patricia Zengerle; Writing by Simon Rabinovitch; Editing by Neil Fullick)