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.