China's alleged over-valuation of the RMB is continuing to hit the headlines, with Premier Wen Jiabao on Wednesday urging European Union officials not to back America's calls for further economic appreciation for the Yuan. According to the BBC, EU finance ministers had already added their voice to the US' concerns before Wen made his speech. It seems that the Premier's fears over a 'chorus' of economic pressure on China (expressed in Xinhua's coverage of the issue) have already begun to be realised.
In his address, Wen was keen to stress the lack of a link between the value of China's currency and the its huge trade surpluses- the problem around which the entire debate centres. America contends that a cheap Yuan is artificially enhancing the business interests of Chinese exporters, at a cost to the job sectors and economies of other nations. 'Not so' says the Premier, who pointed out that previous exchange rate reforms in the PRC have not solved the problem of growing trade surpluses. He also denied that the Chinese government is using its currency as a 'policy weapon', by which it can exert pressure on a more general supranational level. Finally, Wen even went as far as to lay the blame for recent fluctuations in the value of the Euro at the door of the US Dollar, arguing that reform would also harm China's economic interests and (by a ripple effect) those of countries across the world. One only has to look to the recent global recession to see the damage instability in a particular nation's finances can inflict worldwide.
The Premier's arguments are unlikely to deter the European Union from pushing for Beijing to speed up the process of reform. As the world economic landscape changes, huge trade deficits with the PRC will become a less and less desirable state of affairs for nations to be in. The Yuan is set up to eventually become a major world reserve currency, and a global economy based on an overvalued currency would be extremely dangerous. It may be a disadvantage to attempt to burst the Chinese bubble in the short-term. However, the EU countries (like their neighbours) have little choice but to do just that.