U.S. and China Seek Middle Ground on Currency Dispute Ahead of Obama Visit

The currency dispute between the United States and China has often reached a fevered pitch over the past decade, but both nations have softened their stance ahead of U.S. President Barack Obama's visit next week.

However, analysts remain uncertain as to whether or not China and the United States are serious about making policy adjustments, or are simply trying to ensure that Obama's first trip to the nation as president goes smoothly.

In a rare tweaking of policy language, the People's Bank of China (BOC) signaled on Wednesday that it might take other major currencies – not just dollar – into account when guiding its exchange rate.

The BOC said in its quarterly report that it would consider "changes in international capital flows and the trends of major currencies," which could result in an appreciation of its currency, the yuan.

The United States for years has complained that China keeps its currency artificially low to boost its exports and make American goods more expensive. That has resulted in a large trade imbalance. The U.S. trade deficit with China stood at $143 billion through August, and $20.2 billion in that month alone.

The trade imbalance has become something of an albatross as the United States attempts to fight its way back from the worst recession in decades.

"Our manufacturers, I think, would have legitimate concerns about our ability to sell into China," President Obama said in an interview with Reuters. "It is particularly important for us when it comes to Asia as a whole to recognize that in the absence of a more robust export strategy it is going to be hard for us to rebuild our manufacturing base and employment base in this country."

However, China has some concerns of its own. Beijing has been agitated by the rash of trade tariffs the Obama administration has slapped on China's exports in an attempt to level the playing field for American industry.

Obama in September imposed a 35% tariff – on top of the existing 4% duty – on Chinese tires coming into the United States. That order came mainly at the behest of the United Steelworkers union, which says 5,000 union jobs have been lost since 2004 because low-cost Chinese tires are flooding the market. From 2004 to 2008, the number of tire imports from China has tripled.

That was followed in October by a U.S. investigation into seamless steel pipe imports from China. The government agency will make a decision on preliminary anti-dumping duties in December and could impose new duties of almost 100% on imports of steel pipes from China as soon as February.

It looked as though tensions between the two nations had cooled last week at the culmination of the Joint Commission on Commerce and Trade (JCCT), when China said it would lift a ban on U.S. pork imports that it imposed last spring because of fears about swine flu.

But last week, the United States, Europe, and Mexico asked the World Trade Organization (WTO) to arrange a dispute settlement panel to investigate Chinese restrictions on exports of certain industrial metals, triggering a harsh response from the Red Dragon.

"Once again, 'made-in-China' has fallen victim to U.S. trade protectionist measures," lamented an article in Xinhua, China's state-run newspaper. "And it is hardly a week after Washington pledged actions against trade and investment protectionism at the 20th China-U.S. Joint Commission on Commerce and Trade (JCCT) talks in China's eastern city of Hangzhou."

In fact, the paper took direct aim at President Obama himself.

"Recent protectionist moves in the United States are closely linked to its sluggish economic growth and domestic political tussles, but a strong leader should have the guts to be more far-sighted and deliver the pledge he or she has made," the paper said.

In addition to tariffs, Beijing has some currency concerns of its own. China holds about $2.2 trillion in foreign currency reserves, most of which are U.S. Treasuries. That makes the dollar's recent slide, and the United States' loose monetary policy, something of a concern.

Treasury Secretary Timothy Geithner has repeatedly stressed the importance of a strong dollar, doing so again Thursday following a meeting of Asia-Pacific finance ministers.

"It is very important to the United States that we have a strong dollar," he said. "We recognize of course that given the very important role of the U.S. in the global economy, the important role the dollar plays in the system, that we bear a special responsibility for being a source of stability and strength for the global economy."

However, the U.S. Federal Reserve has maintained a particularly accommodative monetary policy, throughout the duration of the financial crisis and will likely continue to do so until growth returns in full. The Fed has cut its benchmark lending rate to a record-low range of 0-0.25% and few analysts believe that rate will be raised until 2010.

That left many some finance ministers skeptical of Geithner's assurances.

"The message to Secretary Geithner was that we need a stable and strong dollar," Russian Deputy Finance Minister Dmitry Pankin told Dow Jones Newswires. "They have to make good on what they profess. The volatility is hurting us in a serious way."

Of course, many analysts are equally skeptical of China's rhetoric regarding its currency.

After all, the BOC's recent suggestion that it is open to strengthening the yuan contrasts with comments made by the nation's commerce minister, Chen Deming, who last weekend called for a stable exchange rate to "create stable expectations" for China's importers.

The BOC "hinted at the growing pressures for appreciation but I would temper that with the commerce minister's comments about the need for currency stability," Ben Simpfendorfer, an economist at RBS in Hong Kong, told the Financial Times.

Similarly, Goldman Sachs Group Inc. (NYSE: GS) wrote in a recent research note: "We believe the decision makers are those at the State Council level who still consider exports growth too weak to change the exchange rate."

News and Related Links:

• Reuters:
  Obama warns strains unless U.S., China balance growth
• Money Morning:
  The Three Key Economic Issues Obama Will Tackle In His First Asia Trip
• Money Morning:
  China Fuming Over the Latest U.S. Trade Complaint
• The Wall Street Journal:
  U.S. Backs Strong Dollar; Trading Partners Not Convinced
• Financial Times:
  Dollar knocked by China renminbi hints

Tags: China, Currency, Exchange Rate, International trade, Jason Simpkins, United States