China should relax the yuan's peg to the US dollar to help cool the economy, US Treasury Undersecretary John Taylor said after talks with Chinese government and central bank officials.
"We stressed [that] flexibility of the exchange rate is an important policy to have in place to prevent the overheating and inflationary pressures," Taylor, the Treasury's undersecretary for international affairs, told reporters traveling with him in Beijing.
"If anything, the overheating is another reason to move toward more flexibility," he said.
Taylor held meetings with People's Bank of China Deputy Governor Li Ruogu (
The US trade deficit with China was a record US$124 billion last year.
China has kept the yuan at 8.3 to the dollar since 1995, effectively capping the price of its exports, to the ire of US trading rivals and lawmakers who claim that the peg hurts US profits and hiring. Some economists, including Federal Reserve Chairman Alan Greenspan, warn that the status quo risks fueling inflation in China.
"There's an economy-wide overheating," Taylor said.
"There is a uniform recognition that it's there and they're trying to address it," he said.
The Bush administration's campaign to convince China to float the yuan has become more intense in an election year as Democrats, factory workers and union leaders target the pegged yuan as a hindrance to US economic growth.
US Senator John Kerry said last month that if he ousts Bush in November he will crack down on "currency manipulation."
While Taylor said Chinese officials had today repeated their pledge to pursue a more flexible currency, no specific date had been set. "They've always said that there's going to be movement in the exchange rate," he said.
Forward contracts in Hong Kong showed yesterday that the yuan would rise to 8.122 in a year if freely traded.
The implied rate was at 8.0545 late Friday in Asia. Such contracts allow investors to bet on the future value of a currency that is not fully convertible, or hedge investments denominated in it.
Taylor said he discussed with his counterparts how the US economy had benefited in the 1970s from the end of the Bretton Woods system of fixed exchange rates, enjoying long economic booms in the subsequent two decades.
"Flexibility means stability," he said.
Private economists are split over whether the Chinese will soon revise their currency policy. Goldman Sachs Group Inc and UBS AG forecast a change this year. Lehman Brothers Holding Inc last week said it expected a shift
RSS