U.S., China Sidestep Yuan as Europe Dominates Talks

By Bloomberg News | May 25, 2010

May 25 (Bloomberg) -- China and the U.S. focused their first day of talks in Beijing on joint efforts to prop up the world’s economy in the face of a European sovereign-debt crunch that pushed off a showdown on the yuan’s value. 

Officials “spent quite a bit of time discussing the European debt crisis,” Chinese central bank Governor Zhou Xiaochuan said at a press briefing. The nation’s currency policy is being “touched upon” at the talks, he said. 

President Hu Jintao said China will move gradually and independently in altering exchange-rate policy after keeping the yuan pegged to the U.S. dollar for 22 months. Treasury Secretary Timothy F. Geithner, who has delayed a report to the U.S. Congress that could name the nation a currency manipulator, said he welcomed China’s commitment to yuan changes. 

“Behind the scenes, U.S. officials will be concerned that Europe’s debt crisis provides a convenient justification for Beijing to delay for a few more months” in ending the peg, said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong who previously worked at the Federal Reserve and Bank of England. 

Jackson sees the yuan rising 5 percent to 6.5 per dollar by the year’s end. In contrast, non-deliverable yuan forwards indicated a 1.5 percent gain in the next 12 months as of 9:41 a.m. in Hong Kong. Investors last week pared back expectations for an appreciation on concern the debt debacle centered on Greece will undermine the global recovery.  

Stocks Jump
The Shanghai Composite Index closed 3.5 percent higher yesterday, the biggest gain since October, on speculation that the government may delay economic tightening measures. It slipped 0.5 percent in early trading today.

China will continue to “steadily advance” currency reform “under the principles of independent decision-making, controllability and gradual progress,” said Hu, 67, echoing language in a May 10 central bank outlook for policy making.

Geithner, 48, said that a more market-driven currency would help Chinese officials to sustain growth, keep inflation low and adjust the nation’s growth model.

The Treasury secretary has “done quite a lot to build up expectations that a move is pretty imminent,” said Mark Williams, a London-based economist at Capital Economics Ltd. who worked at the U.K. Treasury as an adviser on China from 2005 to 2007. “That’s going to come back and bite him if China hasn’t moved by the end of June.”  

Stimulus Exits

Zhang Xiaoqiang, vice chairman of China’s National Development and Reform Commission, said the exchange rate wasn’t mentioned in talks yesterday morning between officials including central bank governors Zhou and Fed Chairman Ben S. Bernanke. 

Both nations’ representatives agreed that caution is needed in exiting from stimulus policies because the foundation of the world recovery isn’t solid and Europe’s sovereign-debt woes have added to uncertainties, Zhang said. Still, Zhou told reporters that “the general analysis is the pace of the global economic recovery will be maintained.” 

Li Daokui, an academic adviser to the Chinese central bank, said yesterday that some progress in the nation’s currency reform “in the near future” would make political sense. He advocated widening the yuan’s trading band and a “slight” gain against the dollar. Li said the comments to Bloomberg Television in Beijing were a personal view.

As the two-day Strategic and Economic Dialogue began, Geithner said that the U.S. and China shared the goals of a more balanced world economy and stronger economic ties. 

Wang on Europe 

Chinese Vice Premier Wang Qishan said that the situation in Europe “impacted market confidence.” 

“It has brought many uncertainties to the slowly recovering world economy, and added to the difficulties of countries concerned in implementing their macro policies,” Wang said. 

In contrast, Geithner said the U.S. and China are well placed to withstand the European fallout, with both countries experiencing stronger-than-expected economic recoveries. 

“Economic growth in the U.S. and China is broader and stronger than many had anticipated, even a few months ago,” Geithner said. Even as European nations face challenges, the U.S. and China, along with India, Brazil and other emerging economies, are “in a much stronger position today to overcome the challenges ahead,” he said. 

‘Level Playing Field’

China needs to reinforce its shift to relying more on domestic demand as exceptional stimulus measures are withdrawn, the Treasury secretary said. Countries need to compete on a “level playing field” and share in the “benefits and responsibilities” of global trade, he added. 

“As we reform the U.S. economy to promote savings and investment, China is reforming its growth model to promote domestic demand and consumption,” he said. “Our common interests lie in building a more stable global financial system less prone to crisis.”

Secretary of State Hillary Clinton is also in China for the talks. Geithner next visits London, Frankfurt and Berlin to reinforce his call for coordinated efforts to address the region’s problems and rein in government spending. 

The Treasury secretary also addressed Chinese efforts to promote technology development, which U.S. companies say may discriminate against foreign-owned businesses. 

“We welcome a more open China today,” Geithner said. “Innovation flourishes best when markets are open, competition is fair, and strong protections exist for ideas and inventions.” 

Microsoft Corp. Chief Executive Officer Steve Ballmer said yesterday that China’s slow progress in stamping out software piracy makes it “less interesting” than India or Indonesia. 

“India is not perfect but the intellectual property protection in India is far, far better than it would be in China,” Ballmer said in an interview in Hanoi, Vietnam.