US-China currency spat reaches tipping point ahead of G20

By Chris Cermak and Bill Smith Jun 22, 2010, 10:48 GMT

Washington/Beijing - A dispute over the value of China's currency threatened to overshadow a summit of world leaders this week, but the Asian powerhouse may have blunted US threats of a trade war with an olive branch just ahead of the gathering.

US lawmakers, many with an eye on November elections, have blamed a mostly jobless US recovery in part on a massive trade deficit with China. Congress is threatening to impose tariffs on China if it does not allow its renminbi (yuan) currency to appreciate.

Europe's concerns differ markedly from those of the US as it fights to shore up its own euro amid a debt crisis. But since both are keen to improve their exports to China, the two sides are likely to present a united front in any push to re-value the yuan.

China's central bank restarted the appreciation process over the weekend, announcing that it would end the yuan's two-year-long peg to the US dollar. The yuan climbed a modest 0.4 per cent against the dollar in Monday trading - the first strengthening since July 2008.

China had allowed its currency to appreciate gradually over five years, but halted the process to stabilize its economy amid the 2008 financial crisis. Chinese officials cautioned that, despite Saturday's announcement, the appreciation will be gradual.

US President Barack Obama said he welcomed China's concession as a 'constructive step that can help safeguard the recovery,' but still planned to raise the exchange rate dispute at the Group of 20 (G20) summit in Toronto this weekend.

'Implementation here is going to be key, and so we're just going to be keeping an eye on that,' White House spokesman Bill Burton told reporters on Monday.

Pressure on Obama only increased after May trade figures showed China's exports to the US surged nearly 50 per cent. But China denies that the value of the yuan is linked to its huge trade surplus, and President Hu Jintao is unlikely to offer more concessions in Toronto.

Chinese officials played down the importance of exchange rates ahead of the G20 summit, accusing US critics of politicizing the issue and making China a scapegoat for US economic problems.

'The renminbi is China's currency, so I don't think it is an issue that should be discussed internationally,' Vice Foreign Minister Cui Tiankai said. Cui is leading China's G20 preparations.

Analysts in China said the revaluation pledge ahead of the summit was expected, and action must now follow to ease foreign concerns.

'The key for managing the political tensions is for the (yuan) to become ever more flexible and market-determined,' said Standard Chartered economist Stephen Green.

US lawmakers have vowed to press ahead in the meantime, pointing to China's rejection of a larger one-off revaluation of the yuan. The legislation would allow the Commerce Department to include currency as a factor in weighing new tariffs on Chinese imports.

'We have heard those words before,' Peter Morici, an economist with the University of Maryland, said of the weekend pledge, calling it 'a cynical ploy to assuage critics less than a week before G20 meetings, and without a substantial one-off revaluation of the yuan.'

Obama has in the past said he believes China is manipulating its currency, but his administration had until recently been reluctant to openly confront China on its currency.

The Treasury Department held off ruling on the charge earlier this year, postponing a semi-annual report to Congress in the hopes of reaching a deal with China. Treasury Secretary Tim Geithner has said the US will 'take stock' of its position after the G20 summit.

Yet if US lawmakers move ahead with tariffs, China could respond with a tit-for-tat move that economists warn would only endanger the economic recovery on both sides.

Foreign Ministry spokesman Qin Gang warned against the currency spat becoming 'an excuse for protectionist measures against China ... These are totally unjustified and will end up hurting both sides.'

Economists estimate the yuan is undervalued against the dollar anywhere from 5 per cent to 50 per cent, but the impact that China's weak currency and the wider trade deficit has on the US economy is hotly disputed.

The Economic Policy Institute, a left-leaning Washington think- tank, in a March study said the trade deficit cost 2.4 million US jobs between 2001 and 2008.

But Joseph Francois of the centrist Center for Economic and Policy Research believes an appreciation of China's currency would actually harm the US job market because the two economies are so interlinked.

A 5-per-cent appreciation in the yuan would wind up costing nearly a quarter-million US jobs, Francois predicted in an April research paper, because a rise in the yuan would cost US companies that rely on Chinese manufacturing and imports for their products.

Geithner has also appealed to China's perspective, arguing it is in the Asian power's own interest to revalue the yuan in order to reduce its reliance on exports. Here, too, Chinese economists are divided on the merits.

In a commentary in the official China Daily, Mei Xinyu, an economist with the Ministry of Commerce, said a speedy revaluation of the currency could be 'disastrous' for China's vital manufacturing sector, on which the nation depends for jobs and economic growth.

But Ben Simpfendorfer, China economist with the Royal Bank of Scotland, said another jump in China's monthly trade surplus in May suggested the need for an 'early move' on revaluing the Chinese currency.

Expect a 'modest appreciation' of the yuan over this year, Simpfendorfer said.