China has told the rest of the world not to meddle with the way it manages the yuan, setting the stage for a clash with its biggest trading partners at next week's G20 summit.
Cui Tiankai, a vice foreign minister who is China's official in charge of preparing for the G20 summit, said the yuan was ‘China's currency, so I don't think it is an issue that should be discussed internationally’.
China has kept the yuan, also known as the renminbi, steady around 6.83 per dollar for almost two years to help its exporters ride out the global financial crisis. Many Western economists believe it is undervalued by as much as 40%.
Obama, under pressure from some lawmakers who accuse his administration of soft-pedaling on China, said free-floating currencies were ‘essential’ to global economic activity, a thinly-veiled reference to the yuan.
His administration has stopped short of accusing China of manipulating its currency to give it a trade advantage, something that some members of Congress have urged.
The US Treasury Department delayed its regular currency report to Congress, which was due in April, angering some lawmakers who think the administration is dragging its feet.
World Bank urges China to hike interest rates
The World Bank today urged China to raise interest rates to curb soaring property prices and rampant borrowing by local governments, which the bank warned were potential risks to the economy.
The bank also downplayed concerns over a 'wage-inflation spiral' in China after Beijing launched a round of minimum wage hikes and several foreign-backed factories raised salaries in response to labour unrest. '
'The gains from letting interest rates play a larger role in monetary policy are likely higher than the costs,' the World Bank said in its latest quarterly update on the world's third-largest economy.
Interest rates in China were significantly lower than expected rates of return on 'property and physical investment', fuelling over-investment and property speculation, it said.
Official concerns that higher interest rates would attract massive capital inflows seemed 'overdone', it added.
Beijing has delayed raising interest rates partly due to concerns it could attract speculative money chasing a relatively higher yield, complicating its efforts to keep the Chinese yuan stable.
Instead, authorities have preferred more targeted measures to curb torrid bank lending, which reached 9.6 trillion yuan ($1.4 trillion) in 2009, and runaway property prices to thwart inflationary pressures and economic overheating.
While core inflation remained low, the bank said major risks to the Chinese economy were rising asset prices, financial strains on local governments that have borrowed heavily to fund infrastructure and other projects, and bad debts.
The recent wave of wage hikes around the country - by the government and factories responding to labour disputes - were 'part of a cyclical issue' and were 'within historical norms', the bank said.
After expanding 11.9% in the first quarter, the bank said it expected the Chinese economy to grow at a slower pace over the rest of 2010. The bank maintained its forecast for China's gross domestic product to surge 9.5% this year, much higher than the government's own target for 2010 of around 8% and the 2009 growth rate of 8.7%.
A slowdown in government-backed spending this year would be partly offset by strong property investment and robust household consumption, it said.
