Even though China’s leaders appear to have reached a consensus that the nation’s currency policy must change, the timing of any shift has been complicated by surging nationalism, a media frenzy in China over the issue and visits by top officials in recent days.
China has spent several trillion yuan in the past 21 months to prevent its currency from rising against the dollar. US lawmakers have become increasingly critical of the policy, complaining that it keeps Chinese exports artificially cheap.
The Chinese news media, which have far more freedom to report on economic issues than political ones, have framed the currency issue mainly in terms of protecting Chinese sovereignty. That has prompted a series of assurances by Chinese officials in the past four days that China will not be pushed by foreign pressure into doing anything against its own interests.
Chinese President Hu Jintao (胡錦濤) told US President Barack Obama in Washington on Monday that China would set its currency policy according to its own social and economic development needs, reported Xinhua, the official China news agency.
Xinhua, the People’s Daily newspaper and Chinese state television all gave prominent coverage to what they described as an assurance by Obama to Hu that the US respected Chinese sovereignty regarding the currency. White House officials confirmed that the two leaders had talked about the currency, but they provided few details.
Hu’s visit to Washington followed a brief trip by US Treasury Secretary Timothy Geithner to Beijing last week, which drew considerable attention to the currency issue even though he tried to keep a low profile. Geithner flew into the airport, met with Chinese Vice Premier Wang Qishan (王岐山) at the airport VIP lounge and quickly left without making any public statements.
US officials have been concerned that public opinion in China against revaluing the currency might make it harder for the government to act. US Undersecretary of State for Economic, Energy and Agricultural Affairs Robert Hormats said during a visit to China over the weekend that a flurry of public discussion about the yuan late last week had proved “counterproductive.”
Allowing the yuan to appreciate would make Chinese-made goods more expensive overseas. Many economists, however, both in China and in the West, say revaluation would be in China’s interest. Appreciation of the currency would help control inflation, limit China’s need to buy low-yielding US Treasury bonds and free China to raise interest rates to halt an emerging real estate bubble.
Investment bank economists are generally skeptical that China will change its currency policy before June, and possibly later. People close to Chinese policymakers say officials would prefer to do it much sooner, but that it became impossible to act in the days before Hu’s visit to Washington, as the issue suddenly drew broad public attention.
Hu’s trip to Washington for a nuclear security summit has made any immediate policy shift more difficult, added these people, who asked not to be identified by name because of the financial and diplomatic implications of the issue.
An official close to Chinese currency policymakers said that Geithner’s visit had also made it harder to handle the issue quietly.
Several people close to Chinese policymakers said that the matter had been complicated by an article last week in the New York Times, which said that Chinese officials were very close to announcing a shift in currency policy and might even act before Hu’s Washington visit if no problem emerged.
The problem for Chinese officials is that the sovereignty issue re-emerged just as they had finally reached consensus that it was in China’s economic interest to make the exchange rate more flexible and allow the yuan to appreciate gradually against the dollar, people with knowledge of the Chinese policy development said.
Through the National People’s Congress in Beijing last month and in the following weeks, senior Commerce Ministry officials had led a chorus of criticism of the US and vowed steadfast resistance to any change in the value of the yuan. The Commerce Ministry is closely aligned with exporters, even measuring its success by how quickly exports increase.
On March 21, Chinese Minister of Commerce Chen Deming (陳德銘) warned that China would post a trade deficit for the month, its first in nearly six years, and said that pressuring China to change its currency policy was “irrational” in light of the trade gap.
Chinese Vice Commerce Minister Zhong Shan (鍾山) visited Washington three days later and said that appreciation of the yuan was “not a good recipe for solving problems.” The ministry even distributed to journalists the cell phone numbers of Chinese academic experts on trade and currency policy, in an attempt to influence public opinion in China and abroad.
But the Commerce Ministry did an about-face at the end of last week. Shortly before the customs agency disclosed on Saturday that China had indeed run a US$7.2 billion deficit last month, Chen declared that the deficit was “only a blip on the radar and will in no way hamper the country’s strong economic growth.”
He added that China would resume trade surpluses in the months ahead.
Chinese central bank Govenor Zhou Xiaochuan (周小川) also seemed to lend support to the idea of a stronger currency when he said last weekend that fighting inflation was the central bank’s top priority. A weak currency tends to fan inflation by making imported goods more expensive.
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