U.S., China to study moves towards floating yuan

U.S., China to study moves towards floating yuan

Alan Wheatley and Adam Entous, Reuters, Bangkok

Chinese President Hu Jintao told U.S. President George W. Bush
on Sunday he was wary of a rapid shift in his country's exchange
rate regime but agreed to a joint panel to study the obstacles in
the way of floating the yuan.

Referring the question of China's currency to an experts'
group would appear to be a face-saving solution for both leaders
to what has become a serious irritant in Sino-U.S. relations.

Although China has consistently argued that it not yet in a
position to unshackle the yuan, Bush is under intense pressure
from manufacturers who blame what they see as an unfairly
undervalued currency for the loss of 2.7 million industrial jobs
in the past three years.

A senior administration official said U.S. Treasury experts
would be dispatched to Beijing for talks to identify the specific
steps that Beijing would need to take to move towards a floating
exchange rate.

The official did not put a timeline on the group's work. Bush
will stand for re-election in November 2004.

The official said Hu explained to Bush why he was reluctant to
introduce more flexibility to the yuan, also known as the
renminbi (RMB), which is virtually fixed near 8.28 per dollar.

"China...is cautious about moving too quickly towards that
goal and feels that rapid changes in the renminbi could lead to
unstable conditions not only in China but in Asia more
generally," the official said.

Hu had spelled out his thinking in greater details in a speech
to businessmen before he met Bush.

Preventing market forces from determining the RMB's value was
the right policy given the condition of China's economy, its
level of financial regulation and the state of its firms.

"On the basis of this system, keeping the exchange rate of the
RMB stable serves China's economic performance and conforms to
the requirements of the economic development of the Asia-Pacific
region and the whole world," he said.

"We will maintain the basic stability of the RMB exchange rate
at a reasonable and balanced level," he added.

The deal to set up a study group at least gives Bush something
to show for his efforts to persuade Asian leaders to let markets
set exchange rates, a message he also delivered in Tokyo on
Friday to Prime Minister Junichiro Koizumi.

Japan was demonised in the 1980s by U.S. manufacturers who
felt Tokyo was unfairly holding down its currency to give its
exporters an edge in world markets. Twenty years on, Japan still
comes in for criticism but much less than China.

A growing number of U.S. businessmen and lawmakers say China's
fast-growing economy and its $384 billion in currency reserves,
the world's second-largest stockpile, are evidence that if
capital controls were removed the yuan would shoot higher.

Alarmed by America's record $103 billion trade deficit with
China last year, some legislators have even threatened action to
repeal Beijing's trade privileges in the United States.

But many economists agree with Chinese policymakers that
China's banks are so weak that freeing the yuan prematurely and
dismantling China's capital controls could precipitate a
financial crisis in the world's sixth-largest economy.

Even the senior U.S. official acknowledged the risks of rapid
liberalization, saying the study group would examine the steps
needed to avoid a sudden outflow of funds from China.

The governor of China's central bank, Zhou Xiaochuan, said
revaluation could throw millions of Chinese peasants out of work
and reaffirmed the authorities' determination to fend off
speculative pressure for a stronger yuan.

"With a view to discourage 'hot money' speculation, it is wise
to re-endorse stability," Zhou said in an interview with China's
official Xinhua news agency released on Sunday.

"This kind of speculation is very likely to fail," he said.

Alert to U.S. political sensitivities with elections looming,
Hu said China would keep opening its market of 1.3 billion people
just as it promised when it joined the World Trade Organization
(WTO) in late 2001.

"China's reform and opening up and accelerated growth in China
present a win-win outcome and a mutual benefit for the whole
world," he said. "We will faithfully play by WTO rules and live
up to our WTO commitments."

Hu reminded his audience pointedly that China had resisted the
temptation to follow many of its neighbors who devalued their
currencies during the 1997/98 Asian economic crisis.

"China made its contribution to financial and economic
stability in Asia and the world at large. We will follow the same
approach of responsibility to the RMB exchange rate issue this
time," Hu said.