Yuan Eclipsed in Beijing Talks by Europe, North Korea

By Bloomberg News

May 26 (Bloomberg) -- U.S.-China talks set up primarily to head off bilateral disputes focused much of the past two days on threats to global stability, as Europe’s debt crisis and military tension on the Korean peninsula overtook the agenda.

About 200 U.S. officials yesterday wrapped up meetings in Beijing as the euro’s decline to an eight-year low against the yen and a 4.7 percent plunge in the won overshadowed sparring on trade and China’s control of its exchange rate. The external distractions, both financial and geopolitical, prompted talk of closer cooperation between what will likely be the world’s two largest economies by year end.

 “The fact that they’re spending lots of time on North Korea and the euro area is a reflection of the current priorities for the global economy,” said Huang Yiping, a professor at the China Center for Economic Research at Peking University and a former Citigroup Inc. chief Asia economist. “These are more pressing issues than the yuan.”

Almost half of President Barack Obama’s Cabinet came to Beijing for the annual Strategic and Economic Dialogue, led by Secretary of State Hillary Clinton and Treasury Secretary Timothy F. Geithner. 

The countries signed agreements ranging from shale gas development to safety standards in China for Westinghouse Electric Co.’s nuclear reactors. China also agreed to open stock futures trading to foreign investors with Chinese licenses such as Goldman Sachs Asset Management International and Yale University.

Global Police

President Hu Jintao set the summit’s tone by portraying the participants as global police with a shared beat. “China and the United States face common tasks and shoulder important responsibilities ranging from promoting full recovery and sustainable growth of the world economy to managing regional hot spots,” he said in his opening remarks. 

Those concerns were born out as the meetings concluded. Global stocks, crude oil and Asian currencies tumbled after a report that North Korean leader Kim Jong Il ordered his military to prepare for combat last week. 

The MSCI Asia Pacific Index dropped 3.1 percent to 108.81 late yesterday in Hong Kong. The euro touched its lowest level in eight years against the yen on concern weakness in the Spanish banking system would damp economic growth. The won fell as much as 4.7 percent to 1,277.90 against the dollar. Today, stocks and the won halted their slides, while the euro traded close to yesterday’s low. 

‘Working Together’

North Korea was accused by an international panel last week of sinking a South Korean warship in March and killing 46 sailors. China has yet to publicly accept the panel’s finding or condemn its communist neighbor.

“We expect to be working together with China in responding to North Korea’s provocative action and promoting stability in the region,” Clinton told reporters in Beijing. “We pledged to stay in very close consultation.” 

China is North Korea’s main economic and political ally as well as the host of stalled talks on its nuclear weapons program. Kim visited several Chinese cities earlier this month in his first foreign trip in four years, culminating with a Hu summit meeting. Chinese Premier Wen Jiabao is heading to South Korea and Japan later this week for previously scheduled talks. 

The Chinese government is ready to work with the U.S. and other countries to ease Korean tensions, Vice Foreign Minister Cui Tiankai told journalists in Beijing. 

$227 Billion Deficit

Two-way trade discussions made some progress. The U.S. said that Chinese officials had agreed to modify rules on encouraging homegrown technology that U.S. companies have complained may shut them out of the government procurement market. 

China in its closing statement emphasized pledges by the U.S. to overhaul controls on exports of technology to China. Last year the U.S. had a $227 billion trade deficit with China, its second-biggest trading partner.

Executives from companies such as Tempe, Arizona-based First Solar Inc., Fairfield, Connecticut-based General Electric Co. and Chicago-based Boeing Co. accompanied Commerce Secretary Gary Locke on a trade mission to China that preceded the Beijing talks. 

The yuan also came up in discussions. I’m “as confident as I’ve ever been” that China has a growing incentive to let the yuan gain against the dollar, Geithner said in an interview with Bloomberg Television. He welcomed President Hu’s pledge of steady and gradual changes to the exchange-rate system. 

No Clear Signal

Traders signaled a contrary expectation. Twelve-month yuan forwards fell yesterday by the most in 15 months on speculation China will delay appreciation of its currency because of Europe’s debt crisis, even as the U.S. pushes for an end to a 22-month peg. Today, contracts indicated zero appreciation over the next three months. 

“The SED talks haven’t sent any clear signal about the next move in the currency policy,” said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank Co., the country’s fifth-largest lender by market value. “There is no chance of an appreciation in the currency within the next two months if the European debt crisis doesn’t settle.” 

China’s Vice Premier Wang Qishan, Geithner’s counterpart at the talks, brought up Europe in the fourth sentence of his opening remarks, saying it had “brought more uncertainties to the slowly recovering world economy.” 

Berlin, Frankfurt

Wang’s comments were echoed by Geithner, who left Beijing for two days of meetings in London, Berlin and Frankfurt to discuss the $1 trillion rescue package intended to stem contagion from Greece’s debt spiral.

“We agreed to support the strong programs of policy reforms and financial support now being undertaken by the nations of Europe,” Geithner said. 

Clinton said U.S.-China relations are back on a “positive” track after a frosty period earlier this year following U.S. arms sales to Taiwan and a meeting between Obama and the Dalai Lama, the exiled Tibetan spiritual leader. 

“Sino-U.S. economic relations have surpassed the bilateral scope and are having a global impact,” Vice Premier Wang said in his closing remarks. “This in itself is the biggest success of the talks.”