U.S. steps up push for a flexible yuan

Posted in United States | 15-Sep-06 | Author: David Lague| Source: International Herald Tribune

Treasury Secretary Henry Paulson makes his first speech on the international economy since joining the Bush Cabinet in July at the Treasury Department in Washington, Wednesday, Sept. 13, 2006.
BEIJING When Henry Paulson became the U.S. Treasury secretary in July, the former Goldman Sachs chairman was widely seen as the ideal voice to argue the Bush administration's economic agenda in China.

Paulson's long experience in dealing with top Chinese officials, gained from 70 visits to China representing the investment bank, meant that he would have the contacts and credibility to be an influential player in what most senior U.S. officials say is their country's most important economic relationship.

However, as Paulson prepares for his first visit to Beijing as Treasury chief next week, few analysts say they believe he will enjoy immediate success in persuading Chinese officials to allow a more flexible currency, a top priority for Washington as China continues to accumulate massive trade surpluses.

Before he arrives in China on Tuesday, Paulson will meet in Singapore on Saturday with the finance ministers from the other Group of Seven industrialized nations: Britain, Canada, France, Germany, Italy and Japan.

The Bush administration is under intense pressure from U.S. manufacturers, unions and influential congressional leaders who complain that Chinese exporters have an unfair advantage from a currency that some say is undervalued by as much as 40 percent.

China posted a record $202 billion trade surplus with the United States last year and is on track to post a similar result this year.

"I don't expect him to be able to push China to significantly appreciate its currency," said Connie Leung, chief economist at ERA Economic Research Analysis, in Hong Kong, a research advisory business specializing on China. "It is quite clear that China will do it gradually and in a safe manner and I think he would appreciate that as well."

Paulson himself appears to be under no illusion about the challenge he faces in dealing with China on currency and a range of other difficult issues including rampant piracy of intellectual property in China.

In a speech Wednesday in Washington outlining his approach to dealing with Beijing, he called for China to adopt a "much more flexible, market driven exchange rate" as a key ingredient to maintain stable growth.

"These reforms will not be easy and they will take time," he said. "That is why we must take a strategic view of our relationship with China."

The International Monetary Fund on Thursday also threw its weight behind calls for China to allow the yuan to appreciate.

In its semiannual world economic outlook report, the fund said the Chinese export boom would continue to drive economic growth of 10 percent through 2007, but a stronger currency would cut the Chinese massive trade surplus.

"Exchange rate appreciation would also bolster households' purchasing power, which, together with reforms to the financial sector, would boost consumption," the report said.

Despite sustained lobbying from the United States, the European Union and other major trading powers, senior Chinese officials insist that it is wrong to blame the value of the yuan for the Chinese trade surpluses.

"The global imbalance is more a result of globalization and macroeconomic policies taken by each country," the Chinese finance minister, Jin Renqing, said last Friday at a meeting of Pacific Rim finance ministers in Hanoi.

In July 2005, Beijing did relent to pressure from its major trading partners and revalued the yuan by 2.1 percent and the currency has since appreciated by a further 2 percent.

Chinese officials have consistently said the yuan exchange rate will be made more flexible gradually.

If Paulson fails to win any concessions from China on the yuan, some experts say they believe his major challenge will be to prevent this failure from becoming a diplomatic flashpoint in Washington where protectionist sentiment is growing.

Most threatening for trade ties between the two countries is a bill being pushed by Senator Charles Schumer, Democrat of New York, that would impose a 27.5 percent tariff on goods imported from mainland China if Beijing fails to allow its currency to rise.

"His biggest fight is going to be in Washington, not in China," said Enzio von Pfeil, chairman of Commercial Economics Asia, an economics advisory business in Hong Kong. "He will be dealing with short-term, vote-hungry politicians rather than people thinking about deeper global relationships."

Analysts said Paulson's familiarity with the Chinese economy could help in efforts to placate critics in the United States. They say he would know how risky it could be for Beijing to harm its export industries with a sharply higher currency. An export slowdown could lead to higher unemployment at a time when the ruling Communist Party already faces widespread social unrest.

They say Paulson would also understand that companies like Dell, DuPont and Apple - with significant investment in China - account for a large proportion of Chinese manufactured exports.

And, he would be aware that the labor and materials paid for in yuan is sometimes only a minor proportion of the overall value of Chinese exports.

"If you understand this, you realize that currency is not the real issue in the U.S. trade deficit," Leung said.

Some economists said that China has room to allow a small appreciation, perhaps 2 percent or more, as a political gesture to its critics.

"I don't think it would hurt the economy," said Li Hui, the Beijing-based head of China research at the investment bank CLSA Asia-Pacific Markets. "China's competitive advantage is not anything like 2 percent of the value of its currency. It is way bigger than that."

But, in keeping with its longstanding policy of refusing to be seen bowing to direct pressure, most experts said Beijing was unlikely to make any concessions during Paulson's visit or immediately afterwards.