China Power

Did China, US Do Currency Deal?

Recent Features

China Power

Did China, US Do Currency Deal?

Have the US and China made a behind-the-scenes deal over the gradual appreciation of the renminbi?

Did the US and China strike a currency deal? That’s the intriguing question floated by the International Business Times this week following the weekend’s meeting of G-20 finance ministers and the last-minute visit to China by US Treasury Secretary Timothy Geithner.

As I wrote at the weekend, despite releasing a letter ahead of last weekend's meeting in South Korea calling for countries with consistent surpluses  'to undertake…exchange rate policies to boost domestic sources of growth and support global demand,' the White House failed to secure support for a proposal to limit current account imbalances to 4 percent of GDP.

The post-G-20 meeting between Geithner and Vice Premier Wang Qishan, held at Qingdao Airport, was reportedly brief, but allowed the two to exchange views on Sino-US economic relations, including what Washington sees as China’s heavily under-valued currency.

As the official Xinhua News Agency reported: ‘Analysts say the Sunday meeting will help China and the US coordinate their stances amid the approaching G20 Summit and the rising debate on the currency issue.

‘“This is an important meeting, given the complex international financial situation,” said Tao Wenzhao, a researcher of American studies with the Chinese Academy of Social Sciences. “Their meeting will help both sides to coordinate stances and achieve consensus at the G20 Summit, enabling them to tackle the global financial crisis in a cooperative spirit.”’

But IBT quotes one US head trader as suggesting that a behind-the-scenes deal may already have been struck that would see the renminbi (yuan) gradually appreciate over 5 years.  An average annual rate of 7.8 percent would amount to 40 percent at the end of 5 years, which is the amount some Western analysts reckon the Chinese currency is undervalued by.

‘This plan is similar to what happened from 2005 to 2008, during which the yuan appreciated over 20 percent over the US dollar. That appreciation stopped in July 2008, when China re-pegged it to the dollar’, the report notes.

Interestingly, South Korean media reported this week that a joint US-South Korean naval exercise in the Yellow Sea that had been planned for later this month had been postponed or even cancelled. The exercise, which was supposed to involve aircraft carrier the USS George Washington, had come in for strong criticism from Beijing. It hasn’t just been the usual conspiracy theorists who have questioned the timing and whether the cancellation was part of a US effort to ease tensions.

Quid pro quo? The US military says of course not, and was clear in its denials to Foreign Policy’s Josh Rogin. Writing in The Cable, Rogin quotes two Pentagon officials:

‘“We absolutely and categorically did not scale back in order to placate Beijing,” a defence official said. “The decision to postpone was due solely to the complexities of the planning process, and not about China. We are working on planning for joint exercises intended to send a clear message to Korea about its behavior and its actions.”

‘Pentagon spokesman Geoff Morrell was adamant. “We have caved to no one,” he said. “The USS George Washington will exercise in Yellow Sea again, just as we have always said it would.”’

Of course, the US isn’t the only country worried about the renminbi. As Bloomberg notes today, Association of South-east Asia nations are likely to press China over the issue at a meeting beginning tomorrow that’s to be attended by US Secretary of State Hillary Clinton, Wen Jiabao, and leaders from Australia, India, Japan, New Zealand, Russia, South Korea and the 10 ASEAN member countries.

Bloomberg quotes former Thai Finance Minister Chalongphob Sussangkarn as saying: ‘China would be more amenable to listen to ASEAN countries than the US and Japan, because it’s very sensitive about being perceived as a big bully…If ASEAN currencies and the Chinese currency appreciate in a similar manner, then there will be much less concern.’

In the meantime, though, China appears determined to rein in its currency after it climbed more than 2 percent against the dollar from early September through the middle of this month.

The Economic Times reported today that the spot yuan ‘fell against the dollar…after the People's Bank of China set another weaker mid-point in a move seen aimed at curbing mounting speculation of further yuan appreciation. The market is dominated by expectations of another round of yuan rises in November during a slew of political events in the United States…and in conjunction with the G20 leaders' summit in Seoul in the middle of the month.’

And China has for its part again taken up an issue I noted at the weekend—criticism of the US policy of quantitative easing (printing money in an effort to stimulate its economy).

Speaking today, Chinese Commerce Minister Chen Deming is quoted as telling state media: ‘Because the issuance of dollars is out of control, and international commodities prices are continuing to rise, China is confronted with imported inflation, which has created major uncertainties for businesses.’