Hu to stand firm on yuan-dollar peg at APEC as China tries to

Hu to stand firm on yuan-dollar peg at APEC as China tries to brake economy

Robert J. Saiget Agence France-Presse Beijing

China will loom large over an Asia-Pacific summit in Chile, with the United States hoping that Beijing will loosen a fixed yuan-dollar link and cool, but not freeze, its red-hot economy.

President Hu Jintao will likely reiterate to his APEC partners China's longstanding goal of making its currency fully convertible when they meet in Santiago this weekend.

But he is unlikely to set a timetable or detail plans to loosen the peg, citing stability in China's markets as a top priority, diplomats and officials said.

They said Hu will also trumpet efforts to cool down an overheated economy to an estimated, and highly enviable, 9.25 percent growth rate in 2004, while restating the importance of stable domestic and global markets for China to maintain sustainable growth.

"China's foreign trade will amount to about US$1.1 trillion this year, while the trade imbalance is estimated at less than $10 billion, which is insignificant," Vice Finance Minister Lou Jiwei said last week.

"Therefore, China has no need to readjust its forex rate," Lou said in an apparent effort to set the stage for Hu before the Asia-Pacific Economic Cooperation forum summit.

The yuan has been pegged in a narrow margin around 8.28 to the dollar for nearly a decade, with many economists expecting China gradually to loosen the peg soon but not to abandon it.

Critics, especially the United States, maintain the currency is undervalued and gives China an unfair trade advantage.

China has nimbly sidestepped international calls to reform its forex regime since they began in earnest over a year ago, by repeatedly proclaiming its intention to do so.

In bilateral talks at APEC with U.S. President George W. Bush, Hu is likely once again to reiterate such intentions. Diplomats said he would urge Washington to scrap export restrictions on high-tech equipment as a way to address a growing U.S. trade deficit with Beijing.

China's trade surplus with the United States ballooned to more than $120 billion last year and has been growing at a record rate, totaling $15.5 billion in September and $15.4 billion in August.

Chinese officials at the summit are expected to try to allay fears of economic overheating but will likely paint a realistic picture of severe developmental imbalances.

Since last year, Beijing has battled to rein in unruly economic growth, especially in the construction, steel and cement sectors. Gross domestic product has run at well over nine percent for the past three quarters.

Concerns that tougher measures may be necessary have prompted Premier Wen Jiabao to warn time and again of the dangers of overheating and the need for further tightening.

The heady investment climate in the world's fastest growing developed economy has led to further problems in China's financial system, causing money supply to expand too fast and compounding Beijing's difficulties in deflating a banking system bloated with cash and eager to lend it.

Last month China raised interest rates for the first time in nine years, the latest in a series of measures to turn down the heat after economic hyperactivity led to severe bottlenecks in energy and transportation.

"The macro-control measures mainly incorporate economic and legal means, with administrative means as a supplement," Ma Kai, head of the National Development and Reform Commission and a part of China's APEC delegation, said last week.

"It will not hinder the rapid development of the Chinese economy."

However, he cautioned that severe imbalances in economic growth have traditionally appeared in China when food production has fallen and overinvestment is rampant -- as at present.

"Ever since last year, unstable elements in the Chinese economy have been gradually increasing. If we don't take some action, the consequences will be dreadful to contemplate," Ma said.