China plays hardball with a US desperate to forge policy consensus

Beijing: As President Barack Obama's trip to Beijing demonstrated, the days when US leaders could get anywhere lecturing China on economic policy are long gone.

The Chinese not only brushed off Obama's appeals this week but harangued the United States for its own shortcomings.

And Obama's inability to wring agreement from China's leaders casts a long shadow over prospects for reinvigorating the global economy.

The immediate issues centred on technical matters of currency valuation and import-export policy.

Beyond the specifics, however, was the simple question of whether the leading industrialised nations could forge agreements on policies that promoted overall economic welfare.

And at least on the evidence of Obama's visit to Beijing, the answer may be no.

While the developed nations of both Asia and the West are bound together in a system of trade and global finance, they have yet to develop an effective system for making policy decisions in the interest of the whole.

Instead, while rhetorically committed to mutual cooperation, Beijing and other capitals make independent decisions for individual reasons — from short-term self interest to internal politics and a desire to flex power on the world stage.

Obama was not alone in asking China to reconsider its economic strategy. Indeed, the head of the International Monetary Fund, Dominique Strauss-Kahn, was in Beijing making the same pitch during Obama's visit, arguing that change was in China's interest, as well as the world's. All the appeals were rejected.

Nor was the larger problem visible only in Beijing. Throughout his Asia trip, Obama pushed host governments to adopt policies that relied less on selling exports to US consumers and to open their markets to more US goods. The responses were muted at best.

Dollar peg

In the case of China, that means it will stick to a policy of using government authority to peg the value of its currency to the dollar instead of letting it fluctuate in response to independent market forces, as other major currencies do.

China's policy helps its economy even as it hobbles US efforts to create jobs and return to prosperity by stepping up imports.

Theoretically, with the dollar falling in value, American products should be cheaper and more competitive overseas. But China, by concurrently reducing the value of the yuan, prevents US companies from gaining that advantage. China's already-cheaper products remain cheaper.

One result is huge US deficits in trade with China. In the first nine months of 2009, the deficit was $165.8 billion (Dh609 billion).

In part, China's refusal to assume greater currency flexibility reflects a growing nationalism and an impulse to flex its new economic strength in the diplomatic arena.

Behind the scenes, it also reflects an effort to cover over a serious split between two of China's most powerful groups — its central bank on one side and China's rich new manufacturing sector, supported by the ministry of commerce.

Officials of China's central bank have been warning political leaders that keeping the yuan artificially low ultimately could hurt China by exacerbating the country's trade imbalance problem and bringing in a flood of so-called hot money, or speculative funds from investors.

Revaluation debate

"It's not the right time for the renminbi to appreciate," says Wu Haoliang, general secretary of the Foshan Textile Association, a group that represents about 3,000 manufacturers in Guangdong province in southeast China.

"Exports are not looking optimistic at all. We're continuing to decline. We know under the current environment that depreciation is not possible."

On why a revaluation in China is imperative, Victor Shih, a China political economy specialist at Northwestern University, said: "That's part of what's needed to rebalance the economy."

But given the domestic pressures facing Beijing, Shih says he doesn't expect Chinese leaders to allow the yuan to rise until China's exports turn positive for at least two quarters.