US plea for yuan revaluation will fall on deaf ears amid EU crisis

Washington As the United States opens top-level talks with China Monday, the Obama administration will try to persuade Beijing to revalue its currency and back away from a policy of promoting Chinese innovation at the expense of foreign firms operating there.

The two issues are seen as a critical part of Obama's goal of reshaping the US-China relationship and the global economy on a more sustainable and balanced basis.

But Washington's plea probably will fall on deaf ears, its arguments undercut by the recent events in Europe as well as the legal and political realities of the day.

"They're likely to issue some joint statements with the usual platitudes, but I'm not expecting any substantive deliverables," said Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington.

During the two-day US-China Strategic and Economic Dialogue in Beijing, both sides also are expected to discuss security issues in Iran and North Korea.

Treasury secretary Timothy F. Geithner, who with secretary of state Hillary Clinton is leading a team of 200 US officials to China, has been saying for weeks that he expects Beijing to let its currency appreciate, something many believe will boost US exports and create more jobs.

Geithner postponed the release of a report due on April 15 on whether China is a "currency manipulator", a determination that could lead to economic sanctions. In doing so, he suggested that Chinese officials were likely to move on the currency issue soon, and analysts figured they would probably act by the end of June. But that was before the debt problems in Greece escalated into a full-blown European crisis, sending the euro down further and threatening the global economic recovery. The euro has fallen about 20 per cent against the US dollar in the last six months. And with Beijing pegging the value of its currency to the dollar, that's meant a corresponding sharp rise in the Chinese yuan against the euro and other European currencies.

Some consolation

The upshot is that Chin-ese goods, like American products, are now much more expensive in European markets, China's top export destination. Analysts on both sides said that Beijing leaders won't be in any hurry to make changes that they fear could further hamper exports and hurt economic growth and employment for millions of its citizens. "One of the messages the Chinese will be delivering to America is, ‘Look, we have to do what we can to protect ourselves from this potentially emerging crisis'," said Donald Straszheim, head of China research at the International Strategy and Investment Group. "That takes precedence over any kind of bilateral steps."

China's party line has long been that it wants greater currency flexibility, but on its own timetable. And before the European crisis more Chinese policymakers were calling for a currency shift, in part to fight inflation at home, because a stronger yuan would make imports cheaper and thus help to hold down prices. Geithner and his lieutenants have appealed to Beijing's self-interest to raise the yuan and gradually let it fluctuate freely in response to market forces, arguing that would help China build a stronger domestic economy less reliant on selling goods to the US and other nations. "I think what's happening in Europe reinforces the imperative that China move quickly to promote homegrown, consumption-led growth in its own economy," said David Loevinger, the Treasury Department's senior coordinator on China affairs.

Varying assessments

In a briefing on Wednesday, Loevinger insisted that the problems in Europe hadn't changed Geithner's approach on the yuan. "We've been very clear with the Chinese that this remains a top priority."

Analysts in China responded coolly to those statements. "That shows US officials don't understand China or the financial markets at all," said Yi Xianrong, an international finance specialist at the Chinese Academy of Social Sciences in Beijing. The European crisis, he said, was "caused by a lack of confidence in the market. A stronger [yuan] will only dampen all the efforts to rebuild confidence.... Keeping the exchange rate stable is key to recovery. The US government should not try to keep pressing China on this".

If US officials come away from the talks empty, American lawmakers and manufacturers are likely to sharpen their calls for tariffs and other tough measures to pressure the Chinese.

The US trade shortfall with China eased last year with the recession, but still ran $227 billion (Dh833.5 billion), accounting for about 44 per cent of the total US deficit in goods.