Michael Casey and Min Zeng, “Nations Use Diplomacy to Press Beijing on Revaluing Yuan”

Nations Use Diplomacy to Press Beijing on Revaluing Yuan, Wall Street Journal
Michael Casey and Min Zeng

WASHINGTON—Concerns over China’s exchange-rate policy were absent from public statements that world financial leaders released after weekend meetings here. But officials from several countries used the forum to nudge Beijing toward a revaluation of the yuan, a move that analysts see as increasingly likely before the end of this quarter.

In voicing their concern that an undervalued yuan creates distortions in world trade and financial flows, officials opted for diplomatically polite language. Some China watchers say such subtle expressions of concern are likely to prove more fruitful than tough talk of sanctions against Beijing, such as those pushed by Sen. Charles Schumer (D., N.Y.).

Chinese officials have repeatedly said they won’t bow to foreign pressure to revalue the yuan.

U.S. Treasury Secretary Timothy Geithner may have had this in mind when, speaking after the ministerial meetings Friday, he said currency reform is “China’s choice” and that he believes it “will decide it’s in their interest.” Later, in a presentation to the oversight board of the International Monetary Fund, Mr. Geithner urged large emerging economies to “return to market-oriented exchange rates, where appropriate” without specifically naming China.

Olli Rehn, the European Union’s commissioner for economic and monetary affairs, was more blunt. Before the same IMF committee, he said “the Chinese authorities are encouraged to implement soon a more flexible exchange-rate regime,” a move that would “contribute to stability by reducing current-account imbalances.”

Meanwhile, in an interview, Brazilian Central Bank Governor Henrique Meirelles said adjustments to “exchange-rate regimes are part of the overall question” of rebalancing the world economy. It is just one part of the mechanism through which current-account surplus countries like China become more dependent on domestically led growth while consumption-heavy countries like the U.S. can increase their savings, he said.

“It is increasingly obvious that not only the U.S., but also Europe and some emerging-market countries that are members of the G-20 believe that greater flexibility in the renminbi [yuan] is good for both China and the global economy,” said Stephen Jen, managing director of macroeconomics at hedge fund BlueGold Capital in London.

But “the lack of any reference” in a communiqué issued by finance ministers from the Group of 20 major economies “to what is an obvious opinion in the world suggests that the G-20 [countries] are restraining themselves in order to respect Beijing’s wishes,” he said. Mr. Jen added that in any case the Group of 20 makes decisions by consensus, which meant China would have vetoed any such reference in the document.

Jim O’Neill, chief economist at Goldman Sachs in London, said the subtle diplomacy effort suggests U.S. and other G-20 officials “perhaps also know that China has decided to move.”

The prospect of a revaluation has been made more likely by recent comments from Chinese officials suggesting that they “are waiting for the right time” to do so, he said.

Officials at the People’s Bank of China are believed to favor letting the yuan rise against the dollar because it would complement other monetary-tightening measures aimed at calming inflationary pressures and curtailing bubbles in China’s high-end real-estate market.
Printed in The Wall Street Journal, page A12

Alan Beattie, “IMF meetings inconclusive”

IMF meetings inconclusive, Financial Times

By Alan Beattie

Published: April 26 2010 03:00 | Last updated: April 26 2010 03:00

The spring meetings of the International Monetary Fund wrapped up over the weekend with most of the contentious issues having been either sidestepped or deferred until a later date.

The International Monetary and Financial Committee – the IMF’s ministerial steering group – met on Saturday and said that countries would continue to work together to boost the world economy. But the fund and most of its member countries declined detailed comment on the Greek financial crisis. And on one of the most contentious topics in global economic governance, the Chinese exchange rate, the committee not only failed to comment but did not even discuss the matter.

Naoto Kan, Japan’s finance minister, was reported as saying: “There wasn’t any talk about the yuan . . . I know everyone is interested. But it wasn’t discussed openly at the G7 or G20 probably because everyone there knew that China won’t like that very much.”

Alistair Darling, the UK chancellor of the exchequer, confirmed that the words “yuan” and “renminbi”, the two names for the currency, were not mentioned once in a meeting that stretched for several hours.

The US, generally the strongest advocate of pressing Beijing to allow the renminbi to rise, has been following a quieter strategy in recent weeks of talking to the Chinese in private. Many analysts in the financial markets believe that the Chinese currency may be allowed to resume crawling upwards somewhere between the middle of May and the middle of June.

Tim Geithner, US Treasury secretary, avoided any pointed reference to misaligned or undervalued currencies in his interventions over the weekend and used encouraging rather than condemnatory language. He said: “In large emerging economies, we have seen encouraging signs of a shift toward more rapid consumption growth that needs to be sustained and reinforced by a return to market-oriented exchange rates, where appropriate.”

On the proposals for bank taxes floated by the IMF last week, both proponents and opponents suggested a consensus was forming behind them. Jim Flaherty, the Canadian finance minister who has led opposition to the taxes, called the campaign to impose them worldwide an infringement on sovereignty and said others were coming round to this point of view.

Mr Geithner suggested that when the US imposed such levies, other countries would come round to the idea. But Mr Darling, whose government also supports taxes on banks’ balance sheets or profits, cautioned there were risks in going it alone. “If you do this thing unilaterally or in blocs of countries and there is regulatory arbitrage, it defeats the process,” he said.

Michael Pettis,”Bad loans could take their toll on China’s growth”

Bad loans could take their toll on China’s growth, Financial Times

By Michael Pettis

Published: April 21 2010 22:54 | Last updated: April 21 2010 22:54

Will China have a banking crisis? Beijing’s massive credit stimulus will almost certainly lead to a future surge in bad loans, but so what? As the more optimistic of China analysts have pointed out many times, the last jump in non-performing loans a decade ago was also widely cited as a sign of impending doom, and yet nothing happened. China grew its way out of the loan mess at little apparent cost.

But did it? The optimists have almost certainly failed to understand how Beijing paid for its earlier banking crises. In fact, the cost of resolving the previous surges in non-performing loans exacerbated China’s domestic imbalances. The current build-up of bad debt may very well do the same.

Beijing used three main tools to manage previous increases in bad loans, all of which passed costs on to bank depositors. First, the central bank slowed the accumulation of non-performing loans by keeping lending rates low. Low borrowing costs made it easier for struggling businesses to roll over the debt as the economy grew and reduced the real value of debt payments.

Second, policymakers infused the banks with additional equity, partly directly and partly by purchasing bad loans at above their liquidation value. They financed these capital infusions by borrowing, which at artificially low rates has the effect of passing the repayment burden on to lenders. Finally and most importantly, the central bank mandated a wide spread between the bank lending and the deposit rate, which increased the profitability of banks substantially and so helped to recapitalise them.

Beijing’s strategy was very successful and certainly prevented a banking crisis, but there was nonetheless a cost. The bail-out implicitly required that bank depositors subsidise the cleaning up of the banking industry. This in effect represented a large transfer of income from the household sector to the banks, to government and to businesses. It is perhaps not surprising, then, that during the period of the bail-out household income, already a relatively low share of gross domestic product, declined to alarming levels.

This is the real risk of rising non-performing loans in China. It is not that China’s banks are likely to collapse. Debt levels are certainly high and highly pro-cyclical – normally a toxic combination – but Beijing largely controls domestic funding and can protect itself from the bank runs that plagued the US and Europe. Like Tokyo in the 1990s, Beijing is in a strong position to continue to fund its rising bank-related liabilities and will not have a debt problem any time soon.

The danger is that the cost of cleaning up the banking system will fall, as in the past, on the household sector. China must reduce its excessive reliance on exports and investment to fuel its continued growth, and the only way that can happen is if household consumption rises as a share of GDP. But since growth in household consumption has always been constrained by growth in household income, it may be unreasonable to expect a surge in consumption when households are also required to clean up a sharp increase in bad loans.

Over the next few years, as trade tensions increase and the world finds it increasingly difficult to absorb China’s rising capacity, the country’s growth will rely more than ever on the growth of household consumption. If the worriers are right and non-performing loans surge, China can nonetheless easily avoid a banking collapse. But that does not mean the cost of cleaning up the banks will be negligible. On the contrary, it will put even more pressure on low-consuming Chinese households and will make the inevitable rebalancing of China’s economy much more difficult than many expect.

Japan showed how difficult. Since 1990 Japanese consumption growth has limped along at between 1 and 2 per cent annually as households have been forced indirectly to clean up their own bad loans. The economy grew much more slowly. Just as Japan slowly rebalanced its economy towards consumption, so must China.

If future Chinese consumption growth also slows because households are forced to foot the new bad-debt bill, we may see the real cost of the current explosion in bad loans – several years of sub-par growth.

The writer is a finance professor at Peking University and a senior associate at the Carnegie Endowment

http://www.ft.com/cms/s/0/9d2a0448-4d77-11df-9560-00144feab49a.html

Geoff Dyer, “China under growing currency pressure”

By Geoff Dyer in Beijing

China under growing currency pressure, Financial Times

Published: April 21 2010 09:54 | Last updated: April 21 2010 09:54

China is facing growing international pressure to begin appreciating its currency ahead of an important meeting of finance ministers and central bank heads from the G20 countries which starts on Thursday in Washington.

The Indian and Brazilian central bank presidents have made the strongest statements yet by officials from their countries about the case for a stronger Chinese currency.

While most of the public pressure on China in recent months has come from the Obama administration and US legislators, the comments underline that other governments are frustrated with China’s policy of operating a de facto currency peg with the US dollar even as its economy expands at a rapid rate.

Henrique Meirelles, head of the Brazilian central bank, said a stronger Chinese currency was “absolutely critical for the equilibrium of the world economy”.

He added: “There are some distortions in world markets. One of them is a lack of growth and another is China.”

Meanwhile, Duvvuri Subbarao, governor of the Reserve Bank of India, said an undervalued renminbi was imposing costs on other countries, including India.

“If China revalues [the renminbi], it will have a positive impact on our external sector,” Mr Subbarao said. “If some countries manage their exchange rates and keep them artificially low, the burden of adjustment falls on some countries that do not manage their exchange rate so actively.”

Last week, Lee Hsien Loong, prime minister of Singapore, said it was in China’s interest to strengthen its currency.

“Now that the crisis is over, it is really in China’s own interests, for its own calculations, to have greater flexibility in its exchange rate, and to avoid a showdown, not just with America, but really with all the rest of its global partners,” he said.

The increase in international criticism of China comes at a time of relative calm between Beijing and the Obama administration over the issue. The assumption among many US officials and currency analysts is that China has already decided to abandon its peg with the US dollar over the next few months, although the exact timing of any change in policy is still unclear.

Beijing’s currency policy had come in for little public criticism in recent months from developing nations even though many have seen their currencies appreciate sharply, in part because the swift recovery in China’s economy over the last year has provided a huge boost to exports that has been felt especially strongly among its neighbours in Asia and commodity producers such as Brazil.

http://www.ft.com/cms/s/0/1d692fd2-4d1c-11df-baf3-00144feab49a.html

Andrew Batson,”No Sure Win for U.S. Manufacturers”

No Sure Win for U.S. Manufacturers, Andrew Batson

http://online.wsj.com/article/SB20001424052748703594404575191921100635144.html

BEIJING—As China appears likely to move its currency off a strict peg to the U.S. dollar, there is a growing consensus among economists that such a shift will neither rescue America’s manufacturing sector nor devastate China’s.

Such views are often lost in the loud debate among politicians in the two countries over what to do about the Chinese yuan. Many U.S. legislators, labor groups and manufacturers say that a seriously undervalued Chinese currency makes it impossible for U.S. producers to compete with imports. Chinese exporters, meanwhile, vocally lobby their government against taking a move they say could destroy their businesses.

“Both sides exaggerate the impact,” said Xu Xiaonian, a professor of economics at the China-Europe International Business School in Shanghai. “The impact of the exchange rate on the Chinese economy and employment is overstated, and the impact on the U.S. trade deficit and employment is also overstated.”

Most economists as well as the leaders of the Group of 20 nations agree the world economy would be more stable if China saved less and relied more on domestic demand, and if the U.S. borrowed less and relied more on exports. In theory, a stronger Chinese currency would push things in that direction by making its exports less attractive to American buyers, and by making U.S. exports more competitive.

How it plays out in practice could be less straightforward.

For one thing, China is almost certain to take a gradual approach—radical change to its currency regime is highly unlikely. The most probable scenario is that the yuan fluctuates more in both directions against the dollar, with authorities allowing modest appreciation. Critics in the U.S. argue that the yuan is as much as 40% undervalued against the dollar.

A stronger currency would certainly affect Chinese exporters, but the currency isn’t the only factor behind their success. The example of Japan is instructive: It continues to run significant trade surpluses even after appreciations of its currency in the 1970s, 1980s and 1990s. As with Japan, the structure of China’s domestic economy matters a lot: Low interest rates and cheap energy and land all play a role in building up Chinese surpluses, economists say, as do continued barriers to imports and competition.

“If China floated its currency and removed capital controls, savings behavior is deeply embedded enough that China would still run a surplus,” though probably a smaller one, said Michael Spence, a professor emeritus at Stanford University’s business school who shared the 2001 Nobel Prize in economics.

And China’s exporters would notice the flip side of a stronger currency. Their imported components and materials would cost less in yuan terms.

“It’s not clear to me how badly they would be hit, if they are importing components and assembling them. The components either get cheaper in yuan terms, or are getting bought with dollars anyway,” said Edgar Hotard, China chairman of Monitor Group, a consultancy.

The “processing trade”—importing components, assembling them and exporting the final product—makes up almost half of all China’s exports, an unusually large share by global standards.

So Chinese exporters will be less affected by a stronger currency than those in a country that relied more on domestic materials.

That is the main reason why J.P. Morgan economists estimate that a 10% trade-weighted appreciation in the yuan would reduce China’s overall exports by only 2%.

The last round of Chinese currency appreciation, from 2005 to 2008, was far from disastrous for exporters.

While the yuan rose 21% against the U.S. dollar, Chinese exporters of toys and textiles saw wider profit margins and larger market share in the U.S. and Europe, according to data from Capital Economics. And China’s overall trade surplus nearly tripled during the period, to $295 billion in 2008 from $102 billion three years earlier.

Chinese exporters of low-end products are still likely to face problems in the future, as domestic wages keep rising. But their losses are unlikely to translate directly into gains for U.S. manufacturers.

“If a job in a Chinese coastal export factory becomes uncompetitive, it is unlikely to go to California and more likely to go to Cambodia,” said Shang-Jin Wei, an economist at Columbia Business School. A decrease in U.S. imports in China could well be offset by an increase in U.S. imports from competitors like India, Vietnam, Mexico or Indonesia, Mr. Wei said.

A stronger Chinese currency would have other domestic economic benefits: by making imports cheaper, it would help combat inflation and raise the global purchasing power of Chinese consumers.

And a currency less strictly tied to the dollar would allow Chinese policy makers to change interest rates more independently of the U.S. In the end, those arguments could prove to be the decisive ones.
Printed in The Wall Street Journal, page C1

“From Yuan, Bang or Whimper?,” Wall Street Journal

From Yuan, Bang or Whimper?, Wall Street Journal

April 19, 2010

Tom Lauricella, Alex Frangos and Mark Gongloff

When China allowed the yuan to rise in 2005, it startled investors and sent waves through the financial markets.

This time around a revaluation is widely expected. So will a higher yuan turn out to be a big yawn?

Not necessarily. Based on the experience of 2005, a rising yuan could boost other Asian currencies, lift commodity prices and hurt U.S. Treasurys. Domestic-focused Chinese stocks are also likely to rise. With China being an even bigger economic force throughout the global economy, sucking up commodities and dominating exports, the market effects could be bigger this time around.

While some market moves have begun in anticipation of a policy change—oil prices are up and Asian currencies are rising—some analysts believe the market may be underestimating the size of any revaluation, leaving open the chance of a bigger-than-expected reaction when a change comes.

The currency markets have for months expected the Chinese currency to rise a bit more than 3% this year. That would take the dollar down to roughly 6.60 yuan from 6.80 yuan, where it has been pegged since 2008. At that time the financial crisis prompted China to put a halt to the gradual, 21% appreciation allowed since July 2005.

But analysts at Morgan Stanley believe China could drive the yuan up 4% to 5% in several steps in 2010, and take the yuan to 6.17 by the end of 2011. Barclays Capital analysts also expect a gradual 5% increase this year.

So far, the markets are betting on China making a gradual and modest move.

A modestly higher yuan “has been out there for quite some time” from the market’s perspective, says Richard Gao, a portfolio manager for Matthews Asia Funds.

An overly aggressive yuan appreciation could be viewed as China clamping down strongly on economic growth. That could result in a flight out of riskier assets, such as emerging-market stocks and commodities.

“If the Chinese came out and let the yuan float freely against the dollar, that changes the entire analysis,” says Nicholas Bohnsack, strategist at Strategas Research Partners. But, he says, “the likelihood of that is extremely low.”

And all bets are off should China decide against making any changes to its currency policy.

HSBC’s currency analysts are recommending that clients hedge against Chinese inaction with relatively inexpensive currency bets that would benefit from the status quo dollar-yuan level. HSBC’s view is that the window for China to move is this quarter. But if it waits, the second half of the year will be filled with charged international meetings and the U.S. midterm elections, which will make it politically difficult for China to act while looking like it isn’t succumbing to outside pressure. And a possible moderation in inflation later this year could lessen the policy justification for letting the yuan rise.

Asian countries, among the most likely to be prime beneficiaries of a rising yuan, have already strengthened in anticipation of a move, and more gains are likely. The dollar has lost 6.8% this year against the Malaysian ringgit, 4.8% against the won and 1.7% against the heavily managed Taiwan dollar. On Wednesday, the Monetary Authority of Singapore revised up its targeted trading range for the Singapore dollar by about 1.3% and said it will allow a gradual appreciation.

Governments there have spent the past year straining to keep their currencies from rising in order to maintain their competitiveness against China. Managing these exchange rates has meant aggressively selling their own currencies and buying dollars.

Sophia Drossos, co-head of global foreign-exchange strategy at Morgan Stanley, says the currencies of South Korea, Taiwan and Malaysia are among those most likely to get a lift from the yuan.

“If China allows more currency strength, then other countries in the region that have strong trade with China, or compete with China, would be more comfortable allowing their currencies to rise,” Ms. Drossos says.

The euro “is most at risk,” says Ms. Drossos. After buying dollars through currency-market intervention, central banks diversify by selling some of those dollars and buying euros. Reduced intervention could lead to reduced demand for the euro. Commodity-related currencies like the Australian dollar are also likely losers.

J.P. Morgan Private Bank is recommending investors bet on some currencies by buying bonds from the World Bank. The bank has issued bonds in the South Korean won, the Singapore dollar and other currencies. Rebecca Patterson, global head of foreign exchange and commodities at J.P. Morgan Private Bank, says investors can benefit if the currency rises, while having the protection of the World Bank.

Ripples from the currency markets could spread to U.S. Treasurys, as Chinese and other Asian governments, with fewer dollars on their hands, buy fewer U.S. Treasurys. Worries of reduced demand from China could result in a short-term selloff, says Guy LeBas, fixed-income strategist at Janney Capital Markets.

In 2005, 10-year Treasury yields jumped from 4.17% to 4.41% in the 14 days after the July revaluation. And from August through December of that year, China’s net purchases of Treasurys slowed to a monthly average of $2.7 billion, from $10.5 billion in the previous seven months, according to Treasury Department data.

Peter Fisher, vice chairman for fixed income at BlackRock Inc., says that while attention will quickly focus on U.S. Treasurys, “if it’s a gradual enough crawling peg and the current-account and trade flows remain more or less the same—which is what I would expect—it’s probably a passing issue.”

In the stock market, the last time China began to allow its currency to strengthen, it helped fuel a huge bull market in Asian stocks. Between July 2005 and October 2007, the Hang Seng China Enterprises Index rose 319%.

At least some of the yuan-strength trade has already helped lift Asian stocks, says Oscar Leung, a fund manager for ING Investment Management in Hong Kong. Shares of Chinese airline companies have benefited recently because they tend to have dollar-denominated debt, but earn in yuan. The paper pulp sector has also gained because companies pay for used paper in the U.S. in dollars, then process in China and sell it domestically for yuan.

Property developers with land financed by foreign debt are also likely to gain.

At Matthews Asia Funds, Mr. Gao is avoiding exporters that would be hurt by a stronger yuan, such as toy and shoe manufacturers, and instead tilting toward Chinese companies poised to benefit from a growing domestic consumer base, such as telecom companies and financials.

Many expect a yuan revaluation to lift commodity prices as it did in 2005, when crude-oil prices jumped nearly 15% in the month after the news.

With a stronger yuan, imported raw materials already in high demand in China—such as crude and copper—would become cheaper there. That could allow increased demand from Chinese companies.

—Liam Pleven contributed to this article.

Write to Tom Lauricella at tom.lauricella@wsj.com, Alex Frangos at alex.frangos@wsj.com and Mark Gongloff at mark.gongloff@wsj.com

http://online.wsj.com/article/SB10001424052748703594404575192022544919504.html

Bob Davis, “China Pressured to Let Yuan Rise”

China Pressured to Let Yuan Rise, Wall Street Journal
Bob Davis

WASHINGTON—China came under more pressure to let its currency rise as Federal Reserve Chairman Ben Bernanke said flatly that the yuan is “undervalued…to promote a more export-oriented economy” and an International Monetary Fund study suggested that a currency move wouldn’t harm Chinese growth if handled properly.

Mr. Bernanke, making his strongest comments on the subject in speaking before Congress’s Joint Economic Committee, said, “It would be good for the Chinese to allow more flexibility in their exchange rate” to “address inflation and bubbles within their own economy” and to help bring more balance to a global economy in which China relies too much on exports and the U.S. too much on borrowing to import.

But Mr. Bernanke, responding to questions from China critic Sen. Chuck Schumer (D., N.Y.) also said that moving the exchange rate alone wouldn’t have a major short-term effect on trade flows—though “over time it would have an impact.”

The Fed chairman’s remarks come amid growing expectations that China will allow its currency to rise, perhaps before leaders of the Group of 20 industrialized and developing countries meet in Canada in June.

The U.S. Treasury recent postponed a decision on whether to label China a “currency manipulator,” an apparent effort to give China some political breathing space to revalue its currency without appearing to bow to U.S. pressure.

On Wednesday, the IMF said in its semi-annual World Economic Outlook that China and other countries that run large current-account surpluses could slash surpluses without harming growth—if they revalue their currencies, shift policy to encourage domestic consumer spending and develop more sophisticated financial markets.

Mr. Bernanke also urged the Chinese, as the IMF has, to create “a stronger safety net” to encourage Chinese consumers to save less and spend more.

The focus on the yuan comes as the Chinese have balked at fully participating in a process organized by the G-20 to better coordinate economic policies across countries, says Eswar Prasad, a former IMF senior official for China. He said China has viewed the effort as a lightly veiled attempt to pressure them on the yuan.

Each country is supposed to submit proposed policies to the IMF, which then is to judge whether the plans, in total, would produce sustainable growth.

G-20 countries aim to use the analysis to press one another to make changes.

Several government officials say the so-called mutual assessment process got off to a rocky start after China supplied only a single year’s worth of data, rather than the five years’ worth the IMF sought.

After a G-20 planning session in Korea in February, several officials said, China made efforts to meet IMF data requests, although a number of G-20 officials remain skeptical of Beijing’s intentions. “The [Chinese] government does not traditionally make medium-term projections,” sought by the IMF, said China’s IMF representative He Jianxiong. “However it has come up with data just for this exercise.”

In their World Economic Outlook, IMF economists analyzed 28 instances over the past half-century when countries cut their trade surpluses. On average, the surplus narrowed by 5.1 percentage points of gross domestic product in the cases studied, but the countries’ growth rate didn’t change appreciably.

Any economic decline caused by an appreciation in currency was offset by other policies, including government stimulus aimed at boosting domestic demand. “There is no evidence that transitioning out of large external surplus was associated with lower growth,” the IMF reported. Harvard University economist Dani Rodrik, whose work the IMF report frequently cites, said that China’s growth is tied to its exchange rate more than other countries at a similar income level and, thus may not benefit from policy changes suggested by the IMF.

That’s “possibly because China is so huge and with so much labor still in extremely low productivity activities,” Mr. Rodrik said.The lesson for China shouldn’t be “full speed ahead,” Mr. Rodrik said, but rather, “caution is warranted.”

Write to Bob Davis at bob.davis@wsj.com

Shen Hong & Aaron Back, “China Balances Tone on Currency, Trade”

China Balances Tone on Currency, Trade, Wall Street Journal
By Shen Hong and Aaron Back
April 14, 2010

BEIJING—Chinese President Hu Jintao indicated to U.S. President Barack Obama that Beijing remains committed to gradually changing its currency policy and helping to increase imports from the U.S., according to a report Tuesday by the state-run Xinhua news agency.

Mr. Hu also signaled Beijing’s displeasure at demands from Washington and elsewhere that China let its currency’s value rise—telling Mr. Obama that any changes to China’s exchange-rate policies would be based on the country’s own economic needs.

But Mr. Hu’s reassurance, at a face-to-face meeting with the U.S. president in Washington on Monday, indicated an effort at conciliation and cooperation on an issue that has been a source of tension between the two nations.

In recent weeks, the Obama administration has been trying to give China time to move on its own on the currency, engaging in behind-the-scenes negotiations with Chinese leaders but refraining from tough talk.

Warming relations and a surprise visit by U.S. Treasury Secretary Timothy Geithner to Beijing last week had set off a wave of speculation that China could be preparing to change its currency policy sooner rather than later.

Mr. Hu, China’s president and the top official of its ruling Communist Party, told Mr. Obama that while China is looking to revamp the way it sets the value of the yuan, it “won’t push forward the reform under external pressure,” according to a Xinhua report.

Mr. Hu’s signal of determination that China wouldn’t bow to pressure and the comments in Beijing on Tuesday will likely reinforce the general belief among analysts that while a sudden, large jump in the value of the yuan against the U.S. dollar is unlikely, China is probably willing to allow its currency to gradually climb upwards in the coming months.

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Keith Bradsher,”Spotlight Complicates China Steps on Currency”

Spotlight Complicates China Steps on Currency, New York Times
Keith Bradsher
Published: April 13, 2010
HONG KONG — Even as China’s leaders appear to have reached a consensus that the nation’s currency policy must change, the timing of any shift has been complicated by surging nationalism, a media frenzy in China over the issue and visits by top officials on each side to Beijing and Washington in recent days.

China has spent several trillion renminbi over the past 21 months to prevent its currency from rising against the U.S. dollar. American lawmakers have become increasingly critical of the policy, complaining that it keeps Chinese exports artificially cheap.

The Chinese news media, which have far more freedom to report on economic issues than political ones, have framed the currency issue mainly in terms of protecting Chinese sovereignty. That has prompted a series of assurances by Chinese officials over the past four days that China will not be pushed by foreign pressure into doing anything against its own interests.

President Hu Jintao told President Barack Obama in Washington on Monday that China would set its currency policy according to its own social and economic development needs, according to Xinhua, the official China news agency.

Xinhua, the People’s Daily newspaper and Chinese state television all gave prominent coverage to what they described as an assurance by Mr. Obama to Mr. Hu that the United States respected Chinese sovereignty regarding the currency. White House officials confirmed that the two leaders had talked about the currency but provided few details.

Mr. Hu’s visit to Washington followed a brief trip by the U.S. Treasury secretary, Timothy Geithner, to Beijing last week, which drew considerable attention to the currency issue even though he tried to keep a low profile. Mr. Geithner flew into the airport, met with Vice Premier Wang Qishan at the airport VIP lounge and quickly left without making any public statements.

U.S. officials have been concerned that public opinion in China against revaluing the currency may make it harder for the government to act. Robert Hormats, the U.S. undersecretary of state for economic, energy and agricultural affairs, said during a visit to China over the weekend that a flurry of public discussion about the renminbi late last week had proved “counterproductive.”

Over the weekend, blogs in China lit up over the issue. One writer, who identified himself as Xiang Songzuo, said Saturday that the American motive in seeking revaluation was “to create an economic bubble and financial crisis in China and to attack the progress China has made toward industrialization, urbanization and modernization.”

Although allowing the renminbi to appreciate would make Chinese-made goods more expensive overseas, many economists, both in China and in the West, say revaluation would be in China’s interest. Appreciation of the currency would help control inflation, limit China’s need to purchase low-yielding U.S. Treasury bonds and free China to raise interest rates to halt an emerging real estate bubble.

Investment bank economists are generally skeptical that China will change its currency policy before June, and possibly not until even later. People close to Chinese policy makers say that officials would prefer to do it much sooner, but that it became impossible to act in the days before Mr. Hu’s visit to Washington, as the issue suddenly drew broad public attention.

Mr. Hu’s trip to Washington for a nuclear security summit meeting has made any immediate policy shift more difficult, added these people, who asked not to be identified by name because of the financial and diplomatic sensitivity of the issue.

An official close to Chinese currency policy makers said that Mr. Geithner’s visit had also made it harder to handle the issue quietly.

Several people close to Chinese policy makers said that the matter had been made complicated by an article last week in The New York Times, of which the International Herald Tribune is the global edition. That article stirred news media interest by reporting that Chinese officials were very close to announcing a shift in currency policy and might even act before Mr. Hu’s Washington visit if no glitch emerged.

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“Mr. Obama and Mr. Hu,” New York Times

Mr. Obama and Mr. Hu, New York Times
Editorial
Published: April 13, 2010

We think President Obama made the right decision — for now — not to pick too public of a fight with China over its currency manipulation.

The administration postponed a report to Congress due this week on Chinese monetary policy. After Mr. Obama met with President Hu Jintao of China in Washington on Monday, the White House made a low-key statement that Mr. Obama had pressed Mr. Hu on the need to “move toward a more market-oriented exchange rate” and played up China’s pledge of cooperation on sanctions for Iran.

Beijing’s aggressive undervaluation of the renminbi is a serious problem for the American economy and the global economy. Going one on one is likely to backfire. The best hope for persuading China to change its ways is with sustained pressure from many countries. It will certainly make it harder for Beijing to hide behind claims of sovereignty and accusations of big power bullying.

That means that Mr. Obama will have to work hard to rally others to jointly press the issue. The best forum is coming in June when the leaders of the world’s biggest economies gather at the Group of 20 meeting in Toronto. They need to use that occasion to tell China, in no uncertain terms, that it cannot keep building up its own economy by undercutting the rest of the world’s exports.

They need to leave no doubt in Beijing’s mind, that its global standing will suffer if it does not listen. Few countries have benefited as much as China from the open trading system. Under sufficient pressure from its trading partners, Beijing would be likely to relent.

It’s still not clear how hard they will have to push.

At Monday’s White House meeting, Mr. Hu reportedly told Mr. Obama that China planned to move away from its fixed currency peg to the dollar. He didn’t say when. And according to remarks released by the Foreign Ministry, he also stated that the objective of changing China’s currency strategy “won’t be advanced by any foreign pressure.” Mr. Hu’s next stop is Brazil. Finance Minister Guido Mantega said last week that China’s exchange rate peg is hurting Brazil’s manufacturing. We hope that Brazilian officials are just as direct in their meetings with the Chinese president.

This is a global problem. The renminbi’s fixed and artificially cheap exchange rate is undercutting exporters throughout the developing world. It also is seriously complicating economic policy-making among China’s neighbors. So long as the Chinese currency remains so cheap, they cannot afford to combat burgeoning inflation by allowing their own currencies to rise because it could further undercut their exports.

China would also benefit from shifting from exports to internal consumption as a source for growth. It would improve the living standards of its citizens. It would ease the job of its central bank in trying to keep inflation at bay. And it would establish China as a more responsible player on the global economic stage.

The Chinese bureaucracy is clearly split. Central bank officials have been arguing for some time that a stronger currency would help them combat rising inflation. The Commerce Ministry is adamantly opposed. Ministry officials latched on to the fact that China recorded its first monthly trade deficit in six years in March — a one-time blip because of fast imports of raw materials for China’s export industry — to argue that their cheap currency is not the cause of global trade and financial imbalances.

It is. China should not be allowed to forget it. Barring a change of exchange rate policy, China’s trade surpluses are going to bloat again in the months to come.

This is not a problem just between the United States and China. It is a problem between China and most of the world. The challenge for President Obama now is to get the rest of the world’s leaders to deliver that message as clearly and urgently as they can.