Rober Pozen, “Bashing Beijing Will Not Help Our Trade Deficit”

Bashing Beijing Will Not Help Our Trade Deficit, Wall Street Journal
August 20, 2010
Rober Pozen

Pressured by the U.S. and other countries, China announced in June that it would adopt a “flexible” exchange rate for the yuan. Yet to date there has been minimal appreciation against the dollar, so the pressure is back. Responding to reports on China’s rising trade surplus in July, Sen. Charles Schumer (D., N.Y.) said last week: “These numbers show just how little motive China has to end its currency manipulation.”

Many American politicians want the yuan to appreciate relative to the dollar in order to reduce the U.S. trade deficit—by making Chinese exports more expensive, and encouraging Chinese consumers to buy more imports. However, the value of the yuan is not the main driver of the U.S. trade deficit. The wages and social safety net of Chinese workers are more important.

Labor is the most significant component of most goods exported from China to the U.S. If wages go up in China, then the prices of its exports will rise—absent a proportional increase in labor productivity. Wages are direct costs of producing Chinese exports, which cannot be easily avoided by currency hedging.

The higher prices of exports from China should reduce the incentive of U.S. consumers to buy low-end goods from China like toys and clothing. While higher prices for Chinese exports will also increase the prices of consumer goods in the U.S., a little price inflation would be a welcome antidote to the dangers of potential deflation in the U.S.

And if wages rise in China, its workers would have more money to spend. Admittedly, Chinese workers are big savers, not spenders, because of the weak social safety net there. Ironically, in the People’s Republic of China, most Chinese workers must rely mainly on their own resources to pay for health care and retirement. Nevertheless, higher wages have been closely correlated with higher private consumption in China, according to the World Bank.

Between 1993 and 1995, for example, wages rose to 54% of GDP from 50% as private consumption rose to 49% from 47% of GDP. Conversely, between 1999 and 2006, wages declined to 40% from 52% of GDP as private consumption dropped to 37% from 47% of GDP.

Over the last two months, the average minimum wage in China has increased by an average of 20% in at least 18 provinces, including Beijing and Shenzhen. These increases in minimum wages reflect the smoldering labor disputes at many Chinese plants. For instance, striking workers at the Honda plants in southern China recently accepted wage increases of 24% to end their strikes. As higher wages are reflected in higher prices of Chinese-made goods, fewer of these goods will be purchased by consumers in America and Europe.

By contrast, the value of the yuan is not closely correlated with the size of the U.S. trade deficit with China. Although the relative value of the yuan to the dollar rose by 20% between 2005 and 2008, the U.S. trade deficit with China climbed to a record $268 billion in 2008, from $202 billion in 2005. There are several reasons for this disconnect between currency values and trade deficits.

First, many exports from China to the U.S. are only assembled in China; as with Apple’s iPod, most of the components are made elsewhere. Since the Chinese input constitutes no more than 10% of such exports, even a 20% appreciation in the yuan would at most increase the prices of these exports by 2%.

Second, the appreciation of the yuan relative to the U.S. dollar may cause China to lose low-end exports to countries like Bangladesh and Vietnam—thus leading to job losses and lower imports by Chinese workers. However, such a shift in low-end exports from China to other countries will not reduce the overall volume of exports to the U.S., just the country of origin.

Third, the volume of U.S. exports to China is primarily influenced by competition with countries such as Germany and Japan on high-end capital goods like supercomputers and jet engines. The critical determinant in this high-end competition is not so much the value of the yuan, but more the value of the dollar relative to the euro and yen.

In short, American politicians should not push so hard for yuan appreciation—which has, by provoking resistance in China, been counterproductive. Instead, they should support higher wages and a stronger safety net for Chinese workers. These measures would not only help reduce the U.S. trade deficit but also would be consistent with recent efforts of China’s officials to improve the living standard of its workers.

Mr. Pozen is chairman emeritus of MFS Investment Management and a senior lecturer at Harvard Business School.

http://online.wsj.com/article/SB10001424052748704023404575429843465266202.html

James Bacchus, “A Trade War With Zero Currency”

A Trade War With Zero Currency, Wall Street Journal
July 12, 2010
James Bacchus

In the past, U.S. congressional threats to slap tariffs on Chinese imports in retaliation for the perceived trade effects of Chinese currency practices were only threats. Now, for the first time, there is a real chance these threats could lead to action.

That’s because the debate in America is changing. Mainstream politicians, the media and even businesspeople are starting to call for action against Beijing. Earlier this month, Andy Grove, former chairman and chief executive of Intel, said the U.S. should “levy an extra tax on the product of offshored labor. If the result is a trade war, treat it like other trade wars—fight to win.” He is far from alone in urging such action.

Thus, there’s growing support in Washington for punitive legislation sponsored by Senator Charles Schumer. The New York Democrat wants to change U.S. law to permit additional tariffs to be applied to Chinese imports to offset the “subsidy” provided by the yuan’s alleged undervaluation. The level of those tariffs could exceed many billions of dollars annually.

Evidently, Senator Schumer has been persuaded that this action would somehow be consistent with U.S. obligations to China under the international rules on which both countries have agreed as members of the World Trade Organization. It is not at all clear that it would be.

Chinese currency practices benefit Chinese producers generally. To fit the definition of a “subsidy” under WTO rules, a governmental action must take the form of a “financial contribution” that, unless conditioned on exports or on the use of domestic over imported goods, must also be “specific” to “certain enterprises.” Successfully defending the notion that Chinese currency practices meet this definition would be difficult, to say the least, in WTO dispute settlement, where there is no precedent for such an assertion or such a ruling.

But given that America is in the middle of a “jobless” recovery, where five unemployed Americans are still seeking work for every one job available, such a move could prove popular. Few members of Congress seeking re-election in November are likely to be dissuaded from voting for such legislation because it may be inconsistent with international law. They would only see the immediate political benefit.

Nor are they likely to be deterred by the possibility of losing a WTO case to China a year or two from now. By that point, they would already be re-elected. Never mind the extensive and expensive trade sanctions that could later be applied lawfully by China if the U.S. lost at the WTO and refused to comply with the verdict.

To his credit, President Barack Obama has refrained from indulging in inflammatory rhetoric or taking precipitous action on the currency issue. Last week, Treasury Secretary Timothy Geithner declined to name China a currency manipulator under U.S. law. Clearly, the Obama administration continues to prefer quiet diplomacy to confrontation as the best course for resolving the currency dispute.

The Chinese government no doubt wants to defuse the situation, too. On the eve of last month’s Group of 20 meeting, Beijing announced it would drop the yuan’s peg to the dollar and let the value of its currency rise. This cooled the heat on China at the summit in Toronto, but it unfortunately didn’t lower the rising political temperature in Washington.

That’s partly because China simultaneously assured its own exporters that the value of the yuan will rise only gradually. Since the announcement, the yuan-dollar exchange rate has hardly budged. Mr. Geithner recently noted he would track “how far and how fast” the value of the yuan rises.

Despite his best intentions, Mr. Obama may not have the votes in Congress to stop the Schumer bill. Many Americans believe the yuan’s weakness makes Chinese exports to the U.S. cheaper and U.S. exports to China more expensive, robbing America of millions of jobs and contributing to America’s large trade deficit with China. It would be hard for the president to veto such a popular piece of legislation in the midst of an election campaign when his party’s continuing control of Congress is in dire jeopardy.

Both sides must act to calm these tensions before the world’s most important trade partners become embroiled in a mutually self-defeating trade conflict. The Schumer bill, if enacted, would thwart ongoing efforts in both countries to sustain the fragile global economic recovery and create more jobs and more prosperity in America and China alike. Whatever the pressures politically, America’s best interest economically is in keeping America open to growing and mutually beneficial two-way trade with China.

For its part, China can stop relying on cheap exports for growth, and start relying on spending by Chinese consumers in its rapidly developing economy. China could also reconsider “indigenous innovation” and other short-sighted, protectionist policies that make U.S. and other trade partners and investors fear that China is retreating from liberalization. Above all, the farther and faster the yuan rises against the dollar, the sooner and more significant the easing of trade tensions.

These actions would do much to help President Obama and others in the U.S. who are trying hard to stop the tariff-rattling and bring the two countries back from the brink of a destructive trade war. It’s in everyone’s interests that they succeed.

Mr. Bacchus is a former chairman of the World Trade Organization’s Appellate Body, congressman and U.S. trade negotiator. He is currently a partner at Greenberg Traurig in Washington.

Fred Bergsten, “New imbalances will threaten global recovery”

New imbalances will threaten global recovery, Financial Times
By Fred Bergsten

Published: June 10 2010 03:00 | Last updated: June 10 2010 03:00

Global imbalances are about to jump again. New estimates from the Organisation for Economic Co-operation and Development suggest that the sharp decline in the exchange rate of the euro, along with tepid European growth, will produce eurozone surpluses of at least $300bn (€251bn, £208bn) annually within the next few years. The tightening of fiscal policies throughout Europe in response to the crisis, along with the new balanced budget amendment in Germany, will both depress domestic demand and require easier monetary policy that will weaken the euro further.

No one would accuse the eurozone of competitive devaluation. However, there is considerable satisfaction throughout Europe with the weak currency. Martin Wolf of this newspaper has already characterised Europe’s de facto strategy to export its way out of stagnation as “stumbling into a beggar-my-neighbour policy”.

Whatever the intent, these European developments will have effects similar to the overt steps taken by other major countries to enhance their trade competitiveness. The most extreme case is the massive intervention by China and surrounding countries to keep their currencies severely undervalued. Other emerging markets are likewise seeking to expand further their war chests of foreign exchange by running large external surpluses. Switzerland has intervened substantially to hold its currency down. The eurozone has joined this “new mercantilism” and the result will be a sharp rise in global imbalances.

The counterpart increases in deficits will again accumulate mainly in the US as no other country could attract the requisite financing. The large deficit countries within the eurozone must reduce their imbalances. Along with the large surpluses of China and other Asian countries, the new European surpluses will probably double the American current account deficit beyond its previous record of $800bn in 2006. The US could then maintain its recovery only by continuing to run large budget deficits and again tolerating debt-financed consumer demand. This is the opposite of the rebalancing strategy agreed by the Group of 20 leading economies as critically important for sustaining global expansion and reiterated by its finance ministers last weekend.

Many regard this scenario as a desirable resolution of the current European crisis. Investor proclivities to buy Treasury securities and dollars could finance the American deficits for a while. The US would provide the global collective good, as in the past, by accepting increased dollar overvaluation and further increases in its external debt and deficits.

There are three glaring problems with this vision, however, all centred on the US. First, the sharp escalation of its own domestic and international imbalances would intensify the risk of future market attacks on the dollar and US financial assets. As soon as Europe and other alternatives regain their acceptability to investors, the unsustainability of the US situation would return to centre stage at even more dangerous levels.

Second, the higher imbalances themselves could sow the seeds of a new financial crisis just as they helped sow the seeds of the last crisis. Such huge inflows of foreign capital would keep US financial markets excessively liquid, hold interest rates down, promote underpricing of risk and thus again generate irresponsible lending and borrowing.

Third, a renewed explosion of the US trade deficit could well trigger the outbreak of protectionist trade policies that has been largely avoided to date. With unemployment remaining very high, job losses to the “new mercantilism” abroad are likely to incite strong political reactions. The virtual absence of a positive trade policy under President Barack Obama has created a dangerous vacuum in which new import restrictions, especially aimed against “unfair exchange rates,” could readily prevail.

At its upcoming summits in Toronto and Seoul, the G20 must adapt its rebalancing strategy to prevent this new threat to continued recovery and lasting global stability. Surplus Germany, along with China and Japan, must stimulate domestic demand. China must let the renminbi strengthen substantially. Joint intervention in exchange markets should prevent or reverse any significant further fall in the euro. Additional allocations of Special Drawing Rights would enable countries to build reserves without running trade surpluses.

Most importantly, the US must convince the world it is unwilling again to become the consumer and borrower of last resort. Only then will other countries stop relying on rising trade surpluses and become serious about generating domestic demand. Such a US strategy will of course focus on medium-term fiscal correction and increased private saving. But it will also have to end the chronic dollar overvaluations of the last 30 years, and euro depreciation along with continued renminbi manipulation will inevitably push currency issues back to the top of the global agenda. The writer is director of the Peterson Institute for International Economics in Washington

Ray Fair, “The Yin and Yang of Yuan Appreciation”

The Yin and Yang of Yuan Appreciation

China is under increasing U.S. pressure to allow its currency to appreciate. Many argue that a yuan appreciation would result in more American jobs. Late last year New York Times columnist Paul Krugman said his “back-of-the-envelope” calculation suggested that if there is no appreciation, then over the next several years what he calls “Chinese mercantilism” “may end up reducing U.S. employment by around 1.4 million jobs.”

But that’s by no means a foregone conclusion. The question of what a Chinese appreciation of the yuan would do to the world economy is complicated. There are many economic links among countries, and they need to be accounted for in analyzing the effects of exchange-rate changes. The standard link that has been stressed in the media is that if the yuan appreciates, Chinese export prices rise in dollars and the U.S. substitutes away from now more expensive Chinese exports to now relatively cheaper American-produced goods. This is good for U.S. output and employment—U.S. jobs are created.

A second link is that China may buy more U.S.-produced goods because they are now cheaper relative to Chinese-produced goods. (The yuan price of U.S. produced goods is lower because a given number of yuan buys more dollars than before.) This is also good for U.S. output and employment.

A third link is that China’s output is lower because it is exporting less. With a less robust economy, China imports less, some of which are imports from America. So from this link U.S. exports are lower, which is bad for U.S. output and employment. The second link is a relative price link—China substitutes towards U.S.-produced goods. The third link is an income link—China contracts and buys fewer imports. Which link is larger is an empirical question.

A fourth link is what I will call a U.S. price link. Import prices on Chinese goods are higher. When shoppers go to Wal-Mart they will find higher prices on Chinese-produced goods. This may lead some U.S. firms to raise their own prices since Chinese price competition is now less. So prices in the U.S. will rise. An increase in U.S. prices leads to a fall in real wealth and usually a fall in real wages, since nominal wages usually adjust slowly to increasing prices. This is bad for U.S. consumption demand and thus for U.S. output and employment. In addition, the Federal Reserve may raise interest rates in response to the increase in prices (although probably not much in the present climate), which decreases consumption and investment demand.

Other issues that matter when analyzing the effects of a yuan appreciation against the dollar are what the euro, pound and yen do relative to the dollar, what the monetary authorities in other countries do, and how closely tied countries are to each other regarding trade. One needs a multi-country model to take into account all these effects. I have such a model and have used it to analyze the effects on the world economy of a Chinese yuan appreciation against the dollar. It turns out that the two positive links mentioned above are roughly offset by the two negative links—the net effect on U.S. output and employment is small. The net effect is in fact slightly negative, but given the margin of uncertainty the bottom line is roughly no net effect at all.

It thus seems to be the case, at least from the properties of my model, that the two negative links mentioned above are larger than many people realize. Chinese output is down enough to have a nontrivial effect on Chinese imports. In addition, the negative effects from the increase in U.S. prices are nontrivial. It seems unlikely that there will be a large increase in U.S. jobs if the yuan does in fact appreciate, contrary to what many think.

Mr. Fair is a professor of economics at Yale University.

http://online.wsj.com/article/SB10001424052702303491304575188470345674394.html

“The way to increase America’s exports to China,” Financial Times

The way to increase America’s exports to China, Financial Times
By Huo Jianguo and John Milligan-Whyte

Published: May 24 2010 03:00 | Last updated: May 24 2010 03:00

President Barack Obama has previously said that the US needs to make a decision on labelling China a “currency manipulator”. Such a statement is not what has come to be expected by China and has been deemed entirely unacceptable. When officials from both sides meet in Beijing today for the latest round of the Strategic and Economic Dialogue, they will certainly have plenty to talk about.

US policymakers say they seek a positive relationship. They believe that disputes and collaboration can be compartmentalised. But, with the economic crisis, confrontation on some issues and co-operation on others cannot be kept apart. Nothing is trivial because negative statements, incidents and trends affect public opinion and policymaking in both nations.

Both sides had established a relatively sound base for co-operation in managing the world financial crisis, but then the US implemented tariffs on steel, tyres and other goods made in China, introduced anti-dumping, anti-subsidy and special protectionist tariffs, and launched six investigations into alleged unfair practices in export trade. A 53 per cent increase in the number of disputes involved $7.6bn of Chinese exports.

Mr Obama has pledged to double US exports to raise competitiveness and stimulate America’s economy. But to increase exports to China, the US needs to remove policies that restrict trade and propose ones that benefit both nations.

Currently, China and the US are each other’s second-largest trading partners. Both have suffered from shrinking exports, but bilateral trade has fared relatively well. However, attempts by Chinese companies to strengthen US-China trade are often blocked by the US government and narrowly focused interest groups. US policymakers need to protect what is of mutual interest instead of getting entangled in trade disputes and politicising economic disputes for short-term benefits.

America is used to having it all its own way. In 1972, as the US opened diplomatic relations with China, it abandoned pegging the dollar to gold. That enabled it – through its monopoly on printing US dollars – to create huge trade and investment advantages. Its economy grew strongly as it managed the value of its currency at the expense of other nations.

Washington has not always fully acknowledged that from 2000, the year China joined the World Trade Organisation, to 2008 the US dollar declined against many currencies, while from 2005 to 2008 Beijing gradually increased the US dollar exchange rate of the renminbi by 21 per cent.

The US stimulus plan increased America’s debt and deficits and will decrease the value of the dollar. China increased its holding of dollars as America’s other trading partners reduced theirs. As the US financial crisis loomed, China pegged the renminbi to increase stability and exert a positive influence on its economic recovery. It will keep a relatively stable renminbi exchange rate to ensure its economic growth is steady rather than uncontrollable, which would harm all nations. Currently, China is providing stability as the largest holder of US government debt and US dollar-denominated reserves.

China-US relations changed when the world learnt that America’s financial system would collapse unless the government saved insolvent US-based global banks, insurance companies and carmakers. The bail-out turned the US government into the largest shareholder of formerly privately-owned companies, subsidising their commercial failure. Laisser faire theories, which US policymakers still demand that China adopt, were suddenly replaced by massive US government control of market forces.

The US often pursues policies that are “win-win” for itself alone. Its policy-makers would undermine China’s vital national security and economic interests while seeking China’s help in protecting America’s vital interests. But the reality is that the policies America proposed are implementable and sustainable only if they are beneficial also for China. The Strategic and Economic Dialogue should focus on new US policies instead of trying to change China’s policies, which are essential for global economic recovery. Huo Jianguo is president, Chinese Academy of International Trade and Economic Co-operation, a subsidiary of China’s Ministry of Commerce. John Milligan-Whyte is chairman, the Center for America-China Partnership

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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“Obama calms China renminbi dispute,” Financial Times

Obama calms China renminbi dispute, Financial Times

By Daniel Dombey and Alan Beattie in Washington and Geoff Dyer in Beijing

Published: April 13 2010 19:07 | Last updated: April 14 2010 04:59

Barack Obama sought to defuse the US-China confrontation over the renminbi on Tuesday by ack­now­ledging Chinese sensitivities about the US ­campaign for currency appreciation.

Speaking at the end of the nuclear security summit he hosted in Washington, the US president depicted the relationship with China as increasingly productive – a sign of his administration’s growing confidence that Beijing is moving the way the US wants on the renminbi and sanctions on Iran. The two issues are among Mr Obama’s international priorities.

“China rightly sees the issue of currency as a sovereign issue,” he said when asked about his meeting on Monday with Hu Jintao, China’s president. “They are resistant to international pressure when it comes to them making decisions about their currency policy and monetary policy.”

But he added that a “more market-oriented currency approach” would be in China’s own interest and would help rebalance its economy away from exports towards domestic consumption and production, so as to avoid “bubbles from building up within the economy”.

Mr Hu has sought a similar delicate path of his own, asserting Beijing’s right to set exchange rate policy while avoiding open conflict with the US over one of the most sensitive issues in international diplomacy.

“China will firmly stick to a path of reforming the yuan’s exchange rate formation mechanism,” he told Mr Obama on Monday, according to China’s official Xinhua news agency. But the agency reported that he also insisted that a move by Beijing “won’t be advanced by any foreign pressure” and indicated he did not share the US view that revaluation would help rebalance the world economy.

“Renminbi appreciation would neither balance Sino-US trade nor solve the unemployment problem in the US,” Xinhua quoted him as saying.

China’s vice foreign minister sent the same message on Tuesday when he told reporters in Washington that China did not believe the world’s economic problems were tied to its exchange rates.

“It is not justified for outsiders to exert pressure (on the currency) and we will not take action under pressure,” Cui Tiankai said, according to Reuters.

Financial markets reacted by lowering somewhat expectations for liberalisation of the renminbi. Economists said a gradual rise beginning around the middle of the year was still the most likely outcome.

“It is only a matter of time before China moves but they like to do things in response to domestic economic conditions,” said Kevin Grice, international economist at consultancy Capital Economics.

US officials also highlight increased co-operation with Beijing on the Iran file, despite disputes this year over Taiwan, Tibet and Google.

“The amount of turbulence … was actually relatively modest when you look at the overall trajectory of US-China relations,” said Mr Obama, noting that China had “sent official representatives to negotiations in New York, to begin the process of drafting a sanctions resolution” on Iran at the United Nations.

In Beijing, the message was more nuanced. “Sanctions and pressure cannot fundamentally resolve the issues, and dialogue and negotiation are the best ways,” said Jiang Yu, a spokeswoman for the Chinese foreign ministry. But she also signalled that UN Security Council measures were now likely. “We believe the Security Council’s relevant actions should be conducive to easing the situation and conducive to promoting a fitting solution to the Iranian nuclear issue through dialogue and negotiations,” she said.

http://www.ft.com/cms/s/0/40ba438a-4723-11df-b253-00144feab49a.html

“China’s Hu rebuffs Obama on yuan,” Associated Press

China’s Hu rebuffs Obama on yuan
AP
Tue Apr 13, 10:17 am ET

BEIJING – Chinese President Hu Jintao rebuffed U.S. calls to re-value China’s currency, telling President Barack Obama that any tinkering with the yuan will be done by Beijing in accord with domestic interests.

Hu defended China’s policy of pegging the yuan to the dollar at a Monday meeting with Obama in Washington and said changes to the exchange rate would not come from U.S. pressure.

“Detailed measures for reform should be considered in the context of the world’s economic situation, its development and changes as well as China’s economic conditions. It won’t be advanced by any foreign pressure,” Hu said in remarks released by China’s Foreign Ministry on Tuesday. He said reform would come based on China’s “own economic and social development needs.”

China’s currency has emerged as prominent friction in a relationship already troubled by disputes over trade, U.S. arms sales to Taiwan and Obama’s meeting with Tibet’s exiled leader, the Dalai Lama.

With high unemployment persisting in the U.S., Congress has been pressuring the Obama administration to punish China for the yuan-dollar peg — a tactic which economists say keeps the currency undervalued and gives Chinese exports an unfair advantage.

Hu told Obama that a rise in the value of the yuan, also known as the renminbi, would not solve U.S. economic ills. “Renminbi appreciation would neither balance Sino-U.S.. trade nor solve the unemployment problem in the United States,” Hu said, according to the remarks.

He reiterated his government’s standing line that China did not intentionally seek a trade surplus with the with U.S. and would buy more goods if Washington relaxed controls on exports of high technology goods.

White House national security aide Jeffrey Bader said Obama reiterated his view that there needs to be “a more market-oriented exchange rate.”

Despite Hu’s statements, many economists and financial analysts believe China will re-value the yuan in the second or third quarter this year. Options include a one-off revaluation or resuming a slow appreciation of the currency.

Beijing used a combination of the two — a one-off revaluation followed by a crawling appreciation — in 2005 when it ended a decade long yuan-dollar peg. But China reverted to the peg in mid-2008 worried about the impact on its exports as the economic crisis took off in the U.S.

The yuan was only one of several issues Obama and Hu discussed — Iran’s nuclear program chief among them. Bader described the meeting as “positive and constructive” and the presidents are “familiar and comfortable with each other.”

In recent weeks, Washington and Beijing have sought to relax tensions that crept into relations late last year after the arms sales and contentious negotiations on climate change. Particular attention has been paid to trying to make discussions of the yuan less heated. U.S. Treasury Secretary Timothy Geithner, on his way home from India, stopped in Beijing last week for a 75-minute discussion with Vice Premier Wang Qishan.

http://news.yahoo.com/s/ap/20100413/ap_on_bi_ge/as_china_us_currency

Yang Yao, “Renminbi adjustment will not cure trade imbalance”

Renminbi adjustment will not cure trade imbalance, Financial Times

By Yang Yao

Published: April 12 2010 03:00 | Last updated: April 12 2010 03:00

Mark Drajem and Sara Eisen, “Chinese Trade Barriers May Undercut Yuan Change, Locke Says”

Chinese Trade Barriers May Undercut Yuan Change, Locke Says, Business Week/Bloomberg
By Mark Drajem and Sara Eisen

April 9 (Bloomberg) — U.S. Commerce Secretary Gary Locke said China should allow the yuan to float, even though import barriers may undercut any boost for American exporters from a revaluation.

“Sometimes it’s like two steps forward and one step backwards, or two steps sideways” when dealing with China, Locke said in a Bloomberg Television interview. “They can revalue their currency, but if they still have market barriers or if they favor their domestic companies, then that revaluation of the currency will not make much of a difference.”

U.S. Treasury Secretary Timothy F. Geithner’s unscheduled meeting with Chinese Vice Premier Wang Qishan in Beijing yesterday fanned speculation the yuan’s 21-month-old peg to the dollar may be scrapped. Geithner last week postponed an April 15 deadline for a U.S. review of currency policies amid pressure from Congress to brand China a currency manipulator.

‘Imminent’ Move

“A move is imminent,” said, Ben Simpfendorfer, Hong Kong-based chief China economist at Royal Bank of Scotland Group Plc, said in an interview. “It’s more likely to be weeks rather than days.”

Geithner and Wang “exchanged views on U.S.-China economic relations, the global economic situation and issues relating to” a May meeting of officials from the two nations in Beijing, according to a Treasury Department statement.

China’s trade surplus with the U.S. last year rose to $226.8 billion, more than the combined deficit the U.S. had with its next nine biggest trading partners, according to Commerce Department data.

The Chinese currency “should be market based; it should be allowed to float,” Locke said from New York. “The Chinese foreign-exchange rate puts American companies at a disadvantage.”

Blaming The Peg

Senators including New York Democrat Charles Schumer and South Carolina Republican Lindsey Graham blame the currency peg for much of the imbalance. The peg keeps the currency undervalued, aiding Chinese exporters and discriminating against foreign competitors, according to economists such as C. Fred Bergsten, director of the Peterson Institute for International Economics in Washington.

U.S. companies are also harmed by Chinese policies to restrict government purchases to software and clean-energy products developed in the country, rules curbing the growth of FedEx Corp. distribution, and by piracy of copyrighted movies and music, Locke said.

Tim Adams, a former U.S. Treasury Undersecretary, said China may allow gains by the yuan “fairly soon” to limit the focus on the currency at international summits in coming months.

The Group of 20 finance ministers’ meeting on April 23 in Washington, the U.S.-China Strategic and Economic Dialogue in Beijing in May, and the G-20 summit in Toronto in June are “key events,” Adams said in an interview from Washington. “I don’t think the Chinese want to go into these key forums talking about the exchange rate.”

Stay Competitive

China’s companies should be able to remain competitive if the yuan rises, Dell Inc.’s China President Amit Midha said today.

“As long as it’s gradual, I think most industries would be able to adjust,” Midha, who is also vice-chair of the China Association of Enterprises with Foreign Investment, said in an interview. “It would be more difficult to adjust if the revaluation was sudden.”

People’s Bank of China adviser Xia Bin said yesterday a small one-time revaluation of the yuan may be better than a return to gradual appreciation because it would help deter speculators. Hong Kong Exchanges & Clearing Ltd. Chairman Ronald Arculli said yesterday that China would avoid a “big- bang” revaluation.

“Where the economic recovery of the global marketplace is still patchy, and not as solid as we would like to see, currency issues are very sensitive,” Arculli, 71, said. “The internationalization of the renminbi is a stated objective of the central government, but the timing of it, how we get there, and all that is what we call ‘work in progress’.”

Level Playing Field

U.S. companies meanwhile remain concerned at the lack of a “level playing field” for goods in China, Locke said.

China introduced rules last year that restrict government purchases to technology products developed in China, the leading complaint of U.S. trade groups representing companies such as Microsoft Corp. and Intel Corp.

Government contracting preferences are among policies, including tax rebates, export restraints and “Buy China” regulations, that limit trade and foreign investment, the U.S. Trade Representative’s office said in a December report to Congress.

Still, Locke said commercial relations between the two countries have benefited since China began to open up its markets and joined the World Trade Organization in 2001.

“We are so economically interdependent with one another,” he said. “The last thing we want to do is engage in a trade war.”

–With assistance by Judy Chen, Kevin Hamlin and Belinda Cao in Beijing. Editors: Steve Geimann, Paul Panckhurst.