China Tells EU to Stop Pressing on Currency

By Juliane von Reppert-Bismarck

(Reuters) - Chinese Premier Wen Jiabao told the European Union on Wednesday to stop piling pressure on Beijing to revalue its currency, saying a rapid shift could unleash disastrous social turmoil.

Wen told an EU-China business forum in Brussels that China would implement a reform of its currency regime announced in June, making the exchange rate more flexible, but rebuffed calls from EU leaders for a rapid and substantial appreciation.

"Do not work to pressurize us on the renminbi rate," the premier said, departing from a prepared speech to a business forum on the sidelines of a summit with EU leaders. "Yes, we are going to proceed with the reforms."

Wen said EU leaders should turn to the U.S. dollar for an explanation of the fluctuations in the exchange rate of the euro. He said China's trade surplus against the United States was due to the specific structures of the two economies, not the yuan exchange rate.

He noted that a U.S. congressman had predicted social unrest in China if there was a rapid rise in the currency, known as the renminbi or yuan.

"Many of our exporting companies would have to close down, migrant workers would have to return to their villages.

"If China saw social and economic turbulence, then it would be a disaster for the world," Wen said.

The United States and the European Union accuse China of keeping its currency artificially weak to promote exports, undermining jobs and economic growth in the West.

The monetary standoff came amid growing signs of a "currency war" in which major industrial nations such as Japan and the United States are seeking to weaken their exchange rates while emerging economies such as Brazil and South Korea are taking or threatening measures to curb capital inflows.

MARKET ECONOMY

The 27-nation EU also pressed Beijing on Wednesday to amend its trade practices to put an end to technology theft, counterfeiting, discrimination against foreign firms and Chinese export controls on rare minerals used in high-technology goods.

European Commission President Jose Manuel Barroso said the EU-China commercial relationship, worth 327 billion euros ($453 billion) in 2009, was one of the most important in the world.

"There is a feeling that economic openness in China could be greatly enhanced," he told the business forum.

German Chancellor Angela Merkel, leader of Europe's biggest export powerhouse, met Wen on Tuesday and pledged to work for China to be granted the 27-nation EU's coveted "market economy" trade status by 2016.

That would give Beijing better protection against European anti-dumping penalties -- a major irritant for the Chinese.

EU Trade Commissioner Karel de Gucht earlier set out a litany of European grievances on which he said China must make progress if it wanted that status before it automatically receives it in 2016 under World Trade Organization rules.

"This question must be considered on the basis of clear commitments, for example, on access to the Chinese market, public procurement, protection of intellectual property and even the exchange rate," he told French daily Le Monde.

SANCTIONS?

The EU signed a free trade agreement with South Korea on Wednesday which could double commerce between them, its first such pact with an Asian partner, after announcing on Tuesday the launch of negotiations for a similar accord with Malaysia.

The deal with Seoul, which takes effect on July 1 pending ratification by the European Parliament, will eliminate 1.6 billion euros ($2.2 billion) of duties a year for EU exporters and tackle non-tariff barriers, like regulations and standards in sectors such as cars, drugs and consumer electronics.

With the Doha round of global trade liberalization talks at an impasse, Brussels is increasingly looking to bilateral and regional agreements as a way to boost commerce.

The United States urged the EU this week to join it in high-level pressure on China to change policy on intellectual property rights and foreign investment.

While some European business leaders want the EU to develop new trade defense instruments that could be used as leverage to change Chinese practices, others are against such sanctions, which would divide member states.

Marc Stocker, from the main EU industry umbrella group, BusinessEurope, said Europe should resist calls to join a move by the U.S. Congress to impose trade sanctions on China for failing to revalue the yuan. "Trade retaliation is, as such, not a good response," he said.

The EU's trade deficit with China fell to 133.1 billion euros in 2009, from 169.5 billion euros in 2008, largely due to the global economic downturn.

But EU industry has said China will benefit from Europe's economic recovery, cranking up its production capacity to supply European demand for cheap industrial inputs and consumer goods, and encroaching on traditional European high-tech markets.

The chairman and founder of China's Zhejiang Geely automaker, Li Shufu, told Reuters some of the investors who funded counterfeiting were likely based in the United States.

"There should be measures to punish violators, but also their investors. Without financial support there could not be as much violation of intellectual property rights," he said.

In recent months the EU has launched several anti-dumping cases. These could result in steep tariffs against Chinese-made products, from fibreglass used in the production of wind turbines and lightweight cars to car wheels and wireless modems.

(Writing by Paul Taylor, editing by Rex Merrifield and Ralph Boulton)