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Better US-China ties could speed currency change

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[April 20, 2010]  SHANGHAI, China (AP) -- For months, economists have expected Beijing to start boosting the value of its currency about now to ease strains in its fast-growing economy. The big question: Would Chinese leaders put off changes to avoid looking weak in the face of mounting U.S. pressure for action?

Washington has helped to defuse that conflict with conciliatory gestures including Thursday's impromptu visit to Beijing by U.S. Treasury Secretary Timothy Geithner. Now analysts expect Chinese leaders to go ahead and let the yuan rise, possibly as soon as within the next few weeks.

"Now that the U.S. has given China more political breathing room, the Chinese can go ahead and do what they were going to do anyway, which is to resume gradual appreciation," said Andy Rothman, macro strategist for CLSA Asia-Pacific Markets.

Beijing tied the yuan to the dollar for decades but broke that link in 2005, allowing it to rise by about 20 percent through late 2008. The government slammed on the brakes after the crisis hit and has since held its currency steady against the greenback, saying China cannot afford further change after losing millions of factory jobs to the plunge in global demand.

Washington and other trading partners complain that Beijing keeps the yuan undervalued by up to 40 percent, giving its exporters an unfair price advantage and swelling its trade surplus. Some American lawmakers are pushing for punitive tariffs on Chinese goods if Beijing fails to act.

Chinese leaders have their own reasons for allowing the yuan to rise. A stronger yuan would boost Chinese consumer spending power, easing reliance on exports. It would narrow China's politically volatile trade surplus, making the flood of foreign money pouring into the economy more manageable.

Economists long expected Beijing to act before the middle of this year so long as exports and economic growth were solid, and March trade data due out next week are expected to be healthy. Still, they caution that any increase will be gradual and is unlikely to narrow U.S. and European trade deficits and create jobs.

China's central bank agitated for the change but faces opposition from the Ministry of Commerce, which argued that exporters of low-profit goods such as shoes and toys would be priced out of foreign markets, threatening job losses and unrest.


Facing pressure to create American jobs, President Barack Obama vowed in early February to "get much tougher" in trade disputes with China and to press for an end to currency regimes that he said depress export prices and put U.S. companies at a disadvantage.

Such prodding made a change politically unpalatable to Chinese leaders. In a nationally televised news conference in March, Premier Wen Jiabao rejected foreign "finger-pointing" to force currency appreciation and said the yuan was not undervalued.

"No government wants to look like it's acting under foreign coercion," said Rothman.

In recent weeks, Obama has backed off the confrontational stance. The Treasury postponed issuing a report to Congress due in April in which it had the option of declaring Beijing a currency manipulator.

In another sign of warming ties, Chinese President Hu Jintao is due to hold talks with Obama during an April 12-13 visit to Washington for a nuclear security summit.

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"A better public opinion environment might make it easier for the decision-makers by giving them more leeway to decide currency policy," said Yu Wanli, a professor at Peking University's Center for International and Strategic Studies.

Some analysts expect the yuan to start rising as early as next month. That would defuse the issue before the June meeting of the U.S.-China Strategic and Economic Dialogue, a high-level annual contact. Others expect action by late June, when Beijing and Washington take part in the Group of 20 meeting of major developed and developing economies.

"The assumption for a lot of people is that there is an understanding, at least implicitly, between Beijing and Washington that Obama is giving them some breathing room but is making clear that they have to do something soon," said Rothman. "Waiting beyond the first week of July would be unacceptable."

Economists caution that a stronger yuan is unlikely to narrow the yawning U.S. trade deficit because American factories don't produce the goods supplied by China. So even if prices rise, buyers would switch to a low-cost foreign supplier such as Mexico or Malaysia.

Chinese officials note that after the 2005 rise in the yuan, the country's trade surplus with the United States continued to widen.

In 2005, Beijing revalued the yuan by 2 percent in a single day, then allowed a gradual, tightly controlled upward crawl that saw it gain about 5 percent annually.

This time, few analysts expect a sharp one-time change. Most are forecasting no more than a 5 percent annual rise by the yuan against the dollar.

"When it does rise, the renminbi will move slowly," Capital Economics said in a report this week, referring to the Chinese currency by its other official name. Instead of a sharp revaluation, "the renminbi will simply resume the gradual rise against the dollar that came to an end in July 2008."

[Associated Press; By ELAINE KURTENBACH]

AP Business Writer Joe McDonald and researchers Bonnie Cao and Yu Bing contributed to this report.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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