China's Yuan Policy will be the Source of Much Discussion, but Little Change During President Hu's Visit

It's unlikely U.S. President Barack Obama will make much headway in his efforts to influence China's yuan policy when he meets with Chinese President Hu Jintao in Washington this week. President Hu made that abundantly clear on Sunday when he rejected U.S. arguments that allowing the yuan to appreciate against the dollar would help the government in Beijing tame inflation.

In response to written questions from The Wall Street Journal and the Washington Post, Hu said he favors greater cooperation with the United States on economic issues but he called the present U.S. dollar-dominated currency system a "product of the past," the newspapers reported on their Web sites.

The Chinese president said his government is fighting inflation with a package of policies, including interest rate increases, and that rising prices can "hardly be the main factor in determining the exchange rate policy," according to a transcript of the answers.

Washington, on the other hand, insists China unfairly boosts its exports by undervaluing the yuan, making its products cheaper overseas. President Obama has promised to raise the topic with Hu when he begins his state visit at the White House on Wednesday.

The yuan ended lower in Shanghai trading yesterday (Monday) after gaining ground against the dollar for five days in a row.

Hu also leveled criticism at U.S. Federal Reserve's efforts to stimulate growth by purchasing large amounts of treasury bonds to dampen long-term interest rates - a strategy that Beijing has said exports inflation to emerging economies, including China.

Hu said that U.S. monetary policy "has a major impact on global liquidity and capital flows and therefore, the liquidity of the U.S. dollar should be kept at a reasonable and stable level."

Hu, who will arrive in Washington tomorrow (Wednesday), said the two nations should "respect each other's sovereignty, territorial integrity and development interests and abandon the zero-sum Cold War mentality."

Hu struck a conciliatory tone when he cited trade, energy and terrorism as areas for strengthening cooperation.

"The biggest achievement for this trip will be a strengthening of mutual trust and setting a tone for future strategic development," Liu Qin, a researcher at the China Institute on International Studies in Beijing, told Bloomberg News. "This visit serves as a connection point for the next generation of Chinese leaders and will lay a solid foundation for the next 10 years."

Meanwhile, a group of U.S. senators seeking to increase pressure on Hu said the time has come for congressional action on China's currency policies, and predicted U.S. lawmakers will pass legislation this year to crack down on Beijing's exchange-rate policy.

"The time for talk is over. We've had enough of China's empty verbiage," U.S. Sen. Charles Schumer, D-N.Y, said during conference call with reporters.

Schumer was joined by U.S. Sens. Debbie Stabenow, D-MI, and Bob Casey, D- PA, in backing legislation targeting countries that devalue their currencies. The measure would force the Treasury Department to cite countries with artificial exchange rate policies, and punish offenders through changes in U.S. trade law.

Hu is expected to meet with senior members of Congress during his visit. Schumer and many other lawmakers have complained for years about China's currency practices. But the nature of global trade imbalances and China's pro-export policies will probably curtail any meaningful progress towards improving trade relations.

During the talks, Obama will point to a trade deficit with China that grew 26% last year to $181 billion, as evidence for changing currency policies. In response, China will argue its total surplus is down nearly 40% from its pre-crisis 2008 peak.

"The U.S. had a trade deficit with 92 countries in 2009. So, the United States doesn't just have problems with China and it has little to do with the renminbi," Zhou Shijian, a senior fellow at the Center for U.S.-China Relations at Tsinghua University in Beijing told Reuters.

"It is an old problem, a structural problem that has been around for more than 10 years," he added.

While agreeing that structural problems are part of the problem, Jeremie Waterman, senior director for China at the U.S. Chamber of Commerce, said Chinese policies are also to blame.

"They've clearly pursued over a number of years very much an export strategy as part of their development," he said. "If China were truly a market economy, they would not have the kind of export numbers that they do."

The Chinese have also erected roadblocks to its services sector that keep U.S. financial, telecommunication and express delivery companies from doing more business there, Waterman told Reuters.

News & Related Story Links:

• Wall Street Journal:
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• Bloomberg:
  Inflation Won't Drive Yuan Appreciation, Hu Says Ahead of U.S. Visit
• Wall Street Journal:
  US Senators Target Beijing's Currency Ahead of Hu Visit
• Reuters:
  Deficit and dogma to frustrate Hu, Obama on trade
• Money Morning:
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