As Obama administration officials arrived in Beijing on Monday for two days of high-level talks between America and China, Beijing officials sought ahead of the newly formed annual strategic summit to avoid open disagreement on the Democratic People’s Republic of Korea (North Korea) apparent sinking of a South Korean warship, exchange rates, currency reforms and other big issues that divide the two nations. DPRK is considered a client-state to China. The American delegation is led by Treasury Secretary Timothy Geithner, and Secretary of State Hillary Clinton. China’s Vice-President Wang Qishan and State Councillor Wu Bangguo is leading the Chinese delegation, with about 200 senior staff from both sides involved in the talks.
Speaking at the opening of the talks, President Hu Jintao said he would seek “gradual progress” on reforming the exchange rate of the Chinese yuan. Meanwhile, the U.S. argues China’s currency policy indirectly and unfairly subsidizes its exports trade which drives huge year-over-year trade deficits in the U.S. China has repeated earlier assurances from previous top-level summits with the U.S. that it would move to de-couple its exchange rate peg from the U.S. dollar, but again has failed to outline specific timetables to accomplish the target. China is currently citing the European debt crisis, and the rapidly declining value of the Euro as a new, and growing concern for its currency policy, but U.S. patience over trade deficits may be wearing thin. Europe, not America, is China’s largest export market.
Still, in comments from the Sunday morning talk-circuit, Geithner admitted that China has made progress in rebalancing its economy towards domestic consumption and away from exports even though its currency remains pegged to the Greenback, as he prepared for the start of the annual US-China summit. Read more from FT here.
Many analysts now believe this “de-pegging” of the Chinese currency – or its appreciation – has drifted as the European financial crisis has thrown fresh doubts over the world economy and global recovery and China’s economy also begins to slow. “China will continue to steadily push forward reform of the renminbi (yuan) exchange-rate formation mechanism in a self-initiated, controllable and gradual manner,” China’s President Hu Jintao said at the start of the second, officially titled, US-China Strategic and Economic Dialogue in Beijing’s Great Hall of the People yesterday. Geithner, for his part, urged the Chinese government “to make sure that companies that export to China, that operate in China and that compete with Chinese companies around the world are competing on a level playing field.” His call was reiterated by U.S. Chamber of Commerce president Thomas Donohue, who said concerns by American businesses about China were at a ten-year high. “The concern is, are we going to have a level playing field? What they are troubled (by) and what we are therefore talking about are the industrial and indigenous innovation policies,” Mr Donohue said in Shanghai yesterday.
Interactive Media: US-China SED Opening Session
The yuan’s value and its effect on U.S. trade are key issues for the sessions of US-China Strategic and Economic Dialogue (SED) in Beijing this week. But U.S. officials have said they will not press hard on the policy until China weighs the effect of the euro’s drop.
In a prepared rebuttal to the U.S. position, China’s main Communist Party daily said in an editorial yesterday that the appreciation of the renminbi “won’t solve the trade imbalance between China and US, nor will it solve the unemployment issue of US.” The English-language China Daily added “China will promote the exchange rate reform according to its own economic development, and specific measures will be based on world and Chinese economies accordingly,” and that “Economic and trade issues shouldn’t be politicised. When a country encounters problems in its economic development, as priority it should think of solving the problems with its own efforts. “Plenty of facts,” it added, “ have proven that transferring the contradictions and building up barriers is not helpful.”
Most analysts were expecting a gradual appreciation of the renminbi to begin this month but the crisis in Europe has put action on the currency on hold. Europe’s debt crisis may be the latest trouble for China’s controversial currency policy, but experts say it should be no reason to stall needed reforms. Chinese officials are said to be delaying a long-awaited increase in the value of the yuan because of concern about new economic pressures in Europe – its largest export market.
Zhang Xiaoqiang, vice-chairman of the National Development and Reform Commission, China’s top economic ministry, said yesterday there had been “no change at all in the basic principles” of China’s position on exchange-rate reform. In addition, China’s commerce minister, Chen Deming, urged the U.S. to lift restrictions on high-tech exports to China, andurged the U.S to recognize China as a market economy.
While the Euro plunged to a four-year low against the Greenback last week, it has also dropped by some 14% against the yuan this year, making Chinese products more costly to buy, and putting at risk, China’s robust export-driven economic growth rate. Analysts say that despite growing pressures for appreciation of its undervalued currency, China may be getting cold feet as it worries about the price effect in Europe and the prospect of lower demand for its goods. “I think they were getting to a decision to revalue, and then this came along and created uncertainty,” said Harvard University economics professor Dwight Perkins. “It hit home to them that the Euro isn’t all that stable.”
In a prepared rebuttal to the U.S. position, China said that the appreciation of the renminbi won’t solve the trade imbalance between China and US, nor will it solve the unemployment problem in the US, adding that China will promote exchange rate reform according to its own economic development.
On May 13, Premier Wen Jiabao had earlier warned that complications of the world financial crisis and the sovereign debt problem “should not be underestimated,” the official Xinhua news agency reported.
The speech to the China-Arab Cooperation Forum in the northern coastal city of Tianjin contrasted with China’s economic performance, which has so far seemed immune to the global slump. But the worry is that the euro’s slide could be a dangerous trap for China’s trade. Since China has kept the yuan tightly pegged at about 6.8Y to the dollar since 2008, it has strengthened against the Euro as Europe’s currency declines. By letting the yuan rise against the dollar now, China may only widen its gap with the Euro, putting more pressure on exports.
In my opinion, the crux of the matter is this: the U.S. expects China to implement currency and economic reforms to its economy that is beneficial to the U.S. while economically harmful to China; while China contends that the U.S. needs to solve its own economic issues precipitated by US Markets, while China pursues and implements economic policies that are inherently beneficial to China, first and foremost. It seems rather obvious to me, but pick your dog in this fight; you decide who is right.
Forbes: Roubini on US-China SED
BBC News: US-China Dialogue – China Vows More Currency Reforms
Sources: Forbes, FT, NYT, BBC World News, et al. Video: AP
