Chinese banks pledges to revalue currency ahead of Paulson visit

Fresh from his plan to overhaul the U.S.'s economic regulatory system, Treasury Secretary Henry Paulson is due to visit Beijing Wednesday and may be confronted by some interesting news.

The People's Bank of China has pledged to make China's currency more flexible in order to hush critics who say the yuan is way undervalued. Most of those critics have come from the United States, where cheap imports from China have led to an unprecedented trade deficit whose growth only stabilized last year. Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., even called on Congress to slap a 27 percent subsidy on Chinese exports to compensate for the undervalued yuan, which is largely pegged to the dollar.

In the past year, the yuan has gained on the slumping dollar, but not enough for some. And even though Chinese exports have become more expensive as a result, currencies in other countries, namely Thailand and India, have lost more against the dollar.

At the Prime Source Forum in Hong Kong Tuesday, a premium apparel sourcing executive told American Shipper that India was all but out as an option for the time being because their currency has risen so fast and cut away margins.

The People's Bank of China, however, appears intent on pacifying U.S. politicians to some degree. A representative said Monday that the bank will work on perfecting the yuan exchange rate mechanism in a proactive and controlled manner,?the South China Morning Post reported.

In other words, don't look for one large revaluation.

The exchange rate shall reflect better demand and market supply conditions in the market,?a statement from the central bank said.

Meanwhile, at the Prime Source Forum, which brings together apparel retailers and manufacturers from around the globe, an executive at the world's largest branded apparel company said not to blame our trade deficit with China on cheap goods and outsourced labor, but rather our national debt and savings habits.

Tom Glaser, president of supply chain for Asia and Europe for VF International, said the cheapness of goods has never historically correlated with our trade balance. VF International handles brands like Wrangler, Lee, The North Face, Nautica and Jansport.

Glaser then put up a diagram explaining that Chinese factories procure raw materials with real cash, then sell their finished goods for real cash to retailers. It's only when the product reaches the United States and is bought by consumers using credit cards that things break down. He said Americans don't have the cash to underpin those credit transactions, meaning the country essentially sends a giant IOU back to China, which is already flush with cash since the Chinese save 35 percent compared to less than 1 percent for Americans.

It's essentially the world's largest vendor financing system, Glaser said. Bebts are driving our deficit. There is a correlation between our debt, our savings rates and our trade deficit. Back to the trade imbalance, the head of China's biggest private bank said this week that mainland banks could be severely hurt by the U.S. economic slump as it would almost certainly reduce China's trade surplus, Reuters reported Tuesday.

That could have a knock-on effect in China's fast-growing stock exchanges, where many export-based companies are now listed, said Ma Weihua, chief executive officer of China Merchants Bank.

Source: American Shipper