By Deborah Solomon in Washington and Jason Dean in Beijing
8 April 2010
Treasury Secretary Timothy Geithner will press Vice Premier Wang Qishan on China’s exchange-rate policy in Beijing Thursday, the latest signal the U.S. and China are trying to resolve the touchy issue of the Chinese currency’s value.
In his visit, announced unexpectedly Wednesday, Mr. Geithner is expected to outline the U.S. rationale for why China should allow its currency, the yuan, to rise, according to U.S. officials. The U.S. doesn’t expect to come out of Beijing with an explicit agreement on the currency, officials said. But they added there are "encouraging" signs the Chinese are preparing to let the yuan appreciate.
Last month, People’s Bank of China Gov. Zhou Xiaochuan indicated that the yuan’s de facto peg to the dollar since mid 2008 was a temporary response to the global financial crisis that would be lifted at some point. And while Chinese government officials and commentators have made clear that any change in currency policy must be driven by China’s own interests, some have suggested China wants to avoid a showdown with the U.S. on the issue.
On Tuesday, Ba Shusong, deputy director-general of Financial Research Institute with the Development Research Center of the State Council, said at a briefing with reporters that a confrontation between China and the U.S., two important world economies, would hurt the global recovery. "Under the current situation, to choose a trade war or currency war is a losing proposition," Mr. Ba said.
Mr. Geithner’s visit comes just days after the U.S. Treasury Department said it would delay a decision on whether to brand China a currency manipulator, and before a meeting next week between Chinese President Hu Jintao and U.S. President Barack Obama, at which China’s currency will be discussed.
Finding a resolution is complicated by the two countries’ competing interests: The Obama administration needs to show results after giving China more breathing room while the Chinese want to avoid being seen as bowing to U.S. pressure.
Mr. Geithner, who has consistently said it is in China’s interest to move on its currency, is expected to tell Mr. Wang that China’s economy would benefit from a more-flexible exchange rate, likely citing such factors as the limitations that a fixed exchange rate puts on China’s ability to control monetary policy, and the need to become less dependent on exports.
Many U.S. lawmakers say China keeps the yuan artificially low so it can sell exports more cheaply to other nations and gain an advantage in global trade. The Group of 20 industrial nations last year agreed to seek what it called a "rebalancing" of the global economy, a goal that also requires China to let its currency appreciate.
The Obama administration has been trying to give China time to move on its own, engaging in behind-the-scenes negotiations with Chinese leaders but refraining from tough talk.
In a strongly worded written statement last week, Mr. Geithner said China has been intervening in its exchange rate but agreed to delay a report to Congress and pursue "U.S. interests" through a series of high-level meetings.
Political observers and economists say they expect China to begin allowing the yuan to rise, but say the Chinese will take steps to make the decision appear independent, possibly by delaying any movement until after Mr. Hu’s visit to the U.S.
"It’s quite likely the Chinese will move on the currency over the next few weeks but they will want to de-link it from any perception of U.S. pressure," said Nicholas Lardy, a senior fellow with the Peterson Institute for International Economics, a Washington think tank.
Economistsview a widening of the yuan’s daily trading band as a likely compromise. Such a shift would allow China to publicly signal it is moving to more exchange-rate flexibility, while allowing it to retain control over the trajectory of the yuan’s value.
The last time China widened the band was in May 2007, ahead of high-level U.S.-China talks. That change allowed the yuan’s value to move up or down 0.5% each day against the central-parity rate, compared to the previous range of plus or minus 0.3%. In practice, the currency has moved much less.
It’s unclear whether the Chinese will move fast enough to satisfy U.S. lawmakers who are moving ahead with legislation that would require the U.S. to impose penalties on countries that failed to address misaligned currencies. A spokesman for Senate Majority Leader Harry Reid said he is open to debating the bill after Congress returns from its recess next week.
New York Sen. Charles Schumer played down Mr. Geithner’s trip, saying "every Treasury secretary . . . says ‘Let me talk to them, I can get them to change,’ and the change almost never occurs and when it does, it’s small . . . and temporary."
Chinese officials reject such criticism, saying their policy is aimed at maintaining stability and avoiding the jolts that can come from currency volatility.
Zhang Yansheng, director-general of the Institute for International Economic Research with the National Development and Reform Commission, China’s economic-planning agency, said at the Tuesday briefing that China has already been working toward a market-oriented exchange rate.