Tag Archives: U.S. yuan

Testy Tone Over Yuan Bodes Ill For Obama Visit To Beijing

An early sign of of some of the bickering over trade and exchange rates that will be going on behind closed doors during  U.S. President Barack Obama’s visit to China: At the APEC meeting in Singapore, the two countries couldn’t agree on the wording of the meeting’s communiqué in the part that referred to currencies. The phrase “market oriented exchange rates”, which was in the draft, was cut from the final version. Chinese officials seem to be getting increasingly testy about the pressure being exerted by the U.S. over the yuan. In Beijing today, Liu Mingkang, a banking regulator, took a pop at the Washington by saying that America’s low interest rate were fueling speculation in “overseas assets markets”, i.e. China’s, in a way that threatened global recovery. This follows a couple of references by President Hu Jintao at the APEC meeting that glossed over exchange rates and hit out at “unreasonable” trade restrictions by developed nations, i.e. the U.S. If this sort of tone continues, Obama’s visit won’t have much trouble hitting the low expectations being set for it.

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The Dollar And The Yuan, Not A Turkish Delight

The finance ministers’ meetings in Istanbul over the weekend revealed a deep crack in the veneer of harmony over the global financial crisis that the world’s leading economies have been seeking to present to the world. Ministers from the seven largest rich nations urged China to take steps to strengthen the yuan, a move Beijing has resolutely declined to undertake since the crisis broke. Yi Gang, a Peoples Bank of China vice governor, who was also in Istanbul for one of the plethora of finance-related meetings, made it clear that wasn’t going to change anytime soon: Beijing’s policy would continue to emphasize stability for now, for all the intention it says it eventually has to free up the yuan, which its critics now hold is undervalued.

This now sets up an interesting confrontation in the foreign-exchange markets. The U.S. dollar has fallen by 15% on a trade-weighted basis over the past six months. The G7 has as good as said it will not intervene to prevent it continuing to decline. China is not going to let that happen, at least not against its own currency: This commentary on Xinhua about what it calls the “G7’s RMB complex” gives a flavor of its mood.

Beijing can manage holding the line (the dollar/yuan rate has barely budged since the crisis began) but  it will have to deal with the consequent hot money and inflation implications even as it faces down the forex traders.

Long-term Washington wants and needs a strong dollar, especially if inflation becomes not just a clear but also a present danger as the economy recovers. For now, at least, it is in the U.S.’s interest, to keep its currency low to shore up exports, particularly those of its beleaguered manufacturers, and to lower the value of the debt that the U.S. Treasury is piling up. Similarly, it is in China’s near-term interest to keep its currency stable (for which read low)  to shore up exports, particularly from its beleaguered manufacturers, and to protect the value of the U.S. Treasury debt it is piling up. Though, of course, neither would admit it.

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