U.S.-China standoff on value of yuan


As President Obama’s trip to Beijing proved, the days when U.S. leaders could jawbone China into making major changes in economic policy appear to be gone. Not only did the Chinese brush off Obama’s appeals this week, they harangued the United States for its own shortcomings.

But the standoff in Beijing marked more than the changing balance of power between two countries -- one riding a wave of surging growth, the other still mired in troubles.

Although Obama wasn’t expected to wring agreement from China’s leaders, the tepid response the president got casts a shadow over prospects for reinvigorating the whole global economy.


The immediate issues in Beijing centered on highly technical matters of currency valuation and import-export policy. Beyond the arcane specifics, however, was the simple question of whether the leading economic powers could forge agreements on policies that promoted the overall welfare of the global economy.

And at least on the evidence of Obama’s visit to Beijing, the answer may be no.

Although many nations in both Asia and the West are bound together in a system of trade and global finance, they have yet to develop an effective system for making policy decisions in the interest of the whole.

Instead, while rhetorically committed to cooperation, Beijing and other capitals make independent decisions, each for its own reasons, including short-term self-interest and internal politics.

Obama was not alone in asking Beijing to reconsider its economic strategy. Other developed nations and some emerging economies in Asia have made similar appeals. The head of the International Monetary Fund, Dominique Strauss-Kahn, was in Beijing making the same pitch during Obama’s visit. He contended that change was in China’s interest, as well as the world’s.

All the appeals seemed to be turned away politely.

Nor was the larger problem visible only in Beijing. Throughout his Asia trip, Obama has pushed host governments to adopt policies that relied less on selling exports to U.S. consumers and to open up their markets to more U.S. goods. The responses were muted at best.

In the case of China, that means that, at least well into next year, it’s likely to stick to a policy of using government authority to peg the value of its currency to the dollar instead of raising the yuan and gradually letting it fluctuate freely in response to independent market forces, as other major currencies do.


Since mid-2008, Beijing has kept the exchange rate fixed at about 6.8 yuan to the dollar.

China’s policy of mandating a set relationship with the dollar helps the Chinese economy even as it hobbles efforts in the U.S. to create jobs and return to prosperity by stepping up American exports.

Theoretically, with the dollar falling in value, American products should be cheaper and more competitive in overseas markets.

But China, by reducing the value of the yuan in lock step with the declining dollar, makes it hard for U.S. companies to gain ground. China’s already cheaper products remain cheaper.

One result is huge deficits for the U.S. in its trade with China. Even though the trade deficit has eased, it was still running at $165.8 billion in the first nine months of this year.

Much the same is true of some other countries, including some of China’s neighbors, that are still struggling with the effects of the global financial crisis.

China’s party line throughout has been that it seeks greater currency flexibility, but on its own timetable, not someone else’s.


In part, China’s refusal to bend reflects a growing nationalism.

Behind the scenes, it also masks a split between two powerful groups -- its central bank and China’s huge job- and tax-generating manufacturing sector, supported by the Ministry of Commerce.

Officials of China’s central bank have been warning political leaders that keeping the yuan artificially low could ultimately hurt China too by exacerbating the country’s trade imbalance problem and bringing in a flood of so-called hot money, or speculative funds from investors.

To keep the yuan pegged to the dollar, “the central bank has to intervene enormously,” said Michael Pettis, a professor of finance at Peking University. It’s why China holds a record of nearly $2.3 trillion in foreign reserves as of September, most of it in dollar-denominated assets.

The central bank’s position is getting a determined push-back from manufacturers and exporters -- especially along China’s wealthy coast -- who stand to reap significant gains in the short term. If the yuan were to rise in value, China’s exports would become more expensive relative to goods in the U.S. and other foreign markets.

“It’s not the right time for the [yuan] to appreciate,” said Wu Haoliang, general secretary of the Foshan Textile Assn., which represents about 3,000 manufacturers in Guangdong province in southeast China.

“Exports are not looking optimistic at all. We’re continuing to decline,” he added. “We know under the current environment that depreciation is not possible.”


Twice a year, a small group of association leaders like Wu, usually no more than 20 people, get together with government officials to air their concerns. Wu said they last met over the summer, and sitting in was an official from the central government’s National Development and Reform Commission, an important policymaking body.

“They pay attention,” Wu said. “But most of the time they can’t give you a direct answer. They have to go back to Beijing and discuss policy.”

Aside from lobbying or sniping between ministries and other groups over the currency, any movement on the subject would be deliberated by the Politburo, the inner sanctum of the Chinese Communist Party, said Arthur Kroeber, managing director of Dragonomics, a Beijing economic research firm.

Kroeber added that despite some terse remarks from officials on the currency, negotiations between U.S. and Chinese were almost certainly more constructive.

But soft as Obama’s selling style apparently was, there was no indication that the Chinese would make a move to revalue their currency any time soon.

“That’s part of what’s needed to re-balance the economy,” said Victor Shih, a China political economy specialist at Northwestern University.


Some financial analysts are predicting a modest increase in the yuan in the first half of next year, but Shih thinks it may come later.

Given the domestic pressures facing Beijing, Shih said he didn’t expect Chinese leaders to make a move on currency until exports stay positive for at least two quarters in a row. Exports were down nearly 14% in October.