Revaluation holds little currency with China

Henry Paulson, the US treasury secretary, stressed talks should continue after he made his last visit to China under the Bush administration.

BEIJING // Henry Paulson, the US treasury secretary, left China after two days of talks with an expected array of co-operation agreements including a US$20 billion (Dh73bn) trade fund with China in the fight against the global credit crisis, but with little progress on the currency front. Before Mr Paulson headed off to China he made a point of stressing the importance of a continuing revaluation of the Chinese currency and said increasing flexibility of the yuan was high on the agenda of the fifth Strategic Economic Dialogue held between the two countries.

The talks were launched on Mr Paulson's initiative two years ago on a six-month basis and are the highest-level forum for exchange between policymakers of the two nations. This session is Mr Paulson's last before the Bush administration leaves office next month. However, after two days of meeting Chinese officials, including Wu Yi, the Chinese vice premier, little if no progress was to be seen on the currency issue.

"While recognising that currency movements will be uneven over shorter periods, the United States encouraged China to continue, and accelerate, RMB appreciation and flexibility," said a statement issued after the talks. When asked at the closing press conference held on Friday if talks had progressed, Mr Paulson avoided directly replying to the question and said: "Continued progress and flexibility is important, and the Chinese side agrees."

The issue was once more on the front pages of the press after the Chinese currency surprisingly fell by one per cent just before Mr Paulson's China visit. Analysts saw the small depreciation as a political sign towards the US and the Obama administration rather than a shift in China's policy - the yuan has risen 20 per cent against the dollar since China lifted the peg against the US currency in 2005.

"A dramatic depreciation or appreciation of the yuan is no good for China," said Zhang Bin, a foreign exchange expert at the Chinese Academy of Social Sciences. The currency has been a continuing source of tension with the US as American manufacturers argue that an undervalued yuan gives Chinese companies an unfair edge and is the main reason for the record trade gap between the two countries. With both economies slowing and the US in a recession, fears sparked before the talks that China would stop the yuan's gradual rise to support its exports and its local economy. China's exports growth has slowed significantly over the past two months forcing hundreds of factories to close and bringing thousands of angry workers to the streets.

"I don't think domestic demand would boom with a cheaper RMB, there is no such evidence," Zhang Bin said. "Furthermore it would not be a good option for the Chinese government, China has to consider its neighbours and reaction from the US," the economist said. But with China now the biggest holder of US treasury bonds and the world turning its eyes to China as a possible solution for the financial crisis, it is now in a much stronger position to negotiate than when the SED talks originated.

"I have always said that decision on yuan is made in Beijing and not anywhere else. Of course the US will always stress that the market has to be the terrain of the exchange rate and for greater flexibility," said Patrick Bennett, a foreign exchange strategist with Société Générale in a telephone interview, adding there was little Washington could do to pressure China at the moment. Other tensions aroused between the two sides when Chinese officials urged the US to take measures to protect China's financial interests. Beijing holds more than 60 per cent of its 2 trillion used for reserves in dollar assets.

On a more positive note, the two countries vowed to work together to fight the negative impact of the economic crisis. On Friday, Mr Paulson announced that both countries would make $20bn available in trade financing to boost commerce. "To support trade flows during this period of financial turmoil the US and China announced today that our two export-import banks will make available an additional $20 billion for trade finance, particularly for creditworthy importers in developing economies," he said.

A fact sheet handed out to reporters during the press conference listed other agreements in the financial services industry, for environment and energy conservation, on trade and investment issues and on food and safety co-operation. Mr Paulson said he did not know if talks would continue under the new Obama administration, though he stressed the importance of the talks for the two countries. "The US-China relationship will continue to be vital to the health of our two economies and the global economy," he said in his closing statement.